Sunday, June 3, 2007

Lotto Tickets - Are they worth it?

There is of course, a quick and easy common sense answer: No. But on my blog posts, I never like the common sense answer, since it rarely takes into account any economic or financial reasoning.

Take for instance New York State Lottery Instant Win (Scratch-Off) tickets. According to New York State's Revenue Estimating Methodology Rules, instant wins have a 65 percent payout ratio (page 128). So now let's run a typical cost benefit analysis.

Consider for this argument that I had driven to the gas station to fill up my tank, and I walked inside to pay when I noticed the tickets. There are no outside costs of arriving at the ticket other than the time I spent tapping my foot waiting for the cashier to hand me the ticket and to scratch off the silver stuff. Although this is probably about 2 minutes of my life, you'll have to bear with me when I say I'm going to consider that a sunk cost, and not worth considering at this point.

Consider then a $1 scratch-off ticket. At 65% payout, the net is -35 cents, which is clearly not worth playing.

But, consider that for every ticket, I gain a 25 cent benefit from feeling like I'm living on the edge. Sometimes, you need a little risk in your life, and this helps fulfill it. Now the net is -10 cents.

Next, consider that I feel an extra bit of good knowing I'm helping out New York education, and this good feeling is worth another 25 cents to me. Now the net is +15 cents!.

Suddenly, it becomes no skin off my nose to go out and buy a ticket. Heck, I'm getting 15 cents of value out of it! I'm essentially buying some good feelings when I buy a ticket, just as if I were to donate some money to charity.

Now with this in mind, you would think I'd be going around willy nilly buying tickets, and feeling extremely good about myself. But let's throw in that sunk cost, and make it actually affect me. Those two minutes do become a drain on my time, and I think it comes out to a 15 cent hit. Now, the net is 0 cents, which means I feel indifferent about buying one or not.

And that is exactly what happens. When I'm feeling lucky, I buy one, since my utility from feeling good is a bit higher that day. If I'm not, the net could be negative for me, so I don't.

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