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How To Bet the Lotteries
In order to graduate from the Summerfield School of Business at the University of Kansas, I was required to take and pass Calculus 101, Calculus 102, a course called Probability and Matrices, and the dreaded Business 368, Statistics. Those four courses in mathematics have thoroughly prepared me to dispense some 100%-authoritative wisdom about how to bet the lottery. Here it is.
The best way to bet the lottery is by pretend.
If you do, and if you keep track, you will eventually become convinced that you shouldn't bet the lottery for real at all.
Why? Because you simply cannot guess the winning numbers often enough.
First, the odds are against you. Second, in case you didn't know it, the likelihood your numbers will come up are exactly the same as anyone else's, no matter which numbers you choose.
It's just that simple.
Those little styrofoam balls don't know anything and they can't remember anything. They're styrofoam, and styrofoam has been scientifically proven to be completely non-alive. Those little balls don't know which numbers came up last time or the time before that or any other time. It's completely random, and completely unpredictable, every single time.
Consequently, your odds of winning with a particular number -- no matter what it is -- depend entirely and only on how many numbers there are to choose from, and that's all there is to it.
If you think that betting your "birthday numbers," whatever they are, on your birthday will confer some special luck on you, you're making the mistake of assuming that those little balls of styrofoam somehow care about you. They don't. They don't even know it's your birthday. In fact, as I say, they're styrofoam.
If you think that betting the same number over and over again in the hope that "it has to come up sooner or later" is a smart idea, you're forgetting that even the best of styrofoam balls can't remember what numbers have hit in the past. (This is one version of what's called the "gambler's fallacy.")
The odds of any particular number hitting -- or not hitting, for that matter -- are exactly the same each time. Repeat that to yourself evey time you actually spend any extra time deciding which numbers to play, because any extra few seconds you spend deciding which numbers to play are wasted. You might as well play the same numbers every time, or not, or anything else, because it just doesn't matter.
Also, if you think that tracking the winning numbers and betting on those that haven't come up yet is a good idea, you too have forgotten that stryofoam forgets. (This is the other version of the gambler's fallacy.)
Now, as to the bad odds.
You don't have to have a Ph.D. in probability to understand that the payoff matrix in lotteries is weighted against you. For example, if you bet a dollar and there are 1,000 possible choices then you should demand that the payoff for winning be $1,000, which means in the long run you'll break even, i.e., on average you'll win once in every 1,000 bets. And even that is a poor investment, because it only breaks you even. Because of the time value of money, there's an opportunity cost even to breaking even, because you could have invested in an FDIC-insured savings account at a measly 2.5% interest.
But lotteries don't work that way. In a lottery, if the odds of winning are 1 out of 1,000, then the payoff might be only $500, which means in the long run if you bet 1,000 times, which will cost you $1,000, you'll end up winning back only $500.
Imagine that I walked up to you on the street and made you this offer: "Let's flip a coin 1,000 times, and every time it comes up heads you have to pay me a dollar, but I'll pay you a dollar only every other time it comes up tails." If you have more brains than money you'll turn me down flat, yet that scenario is no different from the lottery scenario described above.
Here's a related situation that always amazes me: Casinos frequently advertise the payoff ratio of their slot machines, saying something like,
Loosest slots in town! 97% payoff guaranteed!
What they're doing is admitting that you'll lose money on their slot machines. They're specifically saying,
You give us a dollar and we'll give you back 97 cents.
We'll be happy to do that all day and all night, till you don't have any cents left.
And we hope you never figure out what a bad deal this is for you and what a good deal this is for us.
Oh, and thanks for being a moron.
If you chip in a measly dollar a month into an investment that pays a measly 5% compounded monthly for ten years, you'll have earned $35.38 in interest. If you chip in a dollar a month to 97% slot machines, you'll have lost $3.60, a total difference of nearly $40. Now multiply that difference by ten or a hundred dollars a month. Then multiply it by several million people a year. Casino owners are the smart people, and they're taking money from the stupid people at a rate of many several billions of dollars a year.
So, if you agree that a payout ratio of 97 cents on the dollar is a bad deal, consider the payout ratio of, say, the Kansas Lottery. According to an official Kansas Lottery pamphlet issued in January of 2000, the prize money paid out was 53.75% of revenues. Can you believe that? That means that if you spend $100, you can expect to receive only $53.75 in payments. You're out a whopping $46.25, for no good reason except ignorance of the laws of chance and the payout ratio.
Those casinos' slot machine payout ratio of 97% is starting to look real good compared to the lotteries' 53.75%.
If after all this you insist on playing the lotteries, you can maximize your payoff by following these two tips:
Choose cash, not an annuity.
By choosing cash rather than the annuity, you have more flexibility in your investments. An annuity is a good deal only under two circumstances:
One is if prices are falling, i.e., we're seeing deflation, not inflation. When prices are rising over time, an annuity pays back all but the first payment at dollars that are worth less, but when prices are falling, those later payments are worth more and more at the time they're paid. Note that deflation rarely occurs; usually there's mild to rampant inflation, which is exactly what the lottery people are literally banking on.
The other circumstance is if you have so little self-control that you wouldn't be able to prevent yourself from blowing too much of your winnings if they were paid all at once.
Choose a number that's less likely to be chosen.
By choosing a number that's less likely to be chosen by the other bettors, you split the winnings, in the unlikely event they accrue to you, with fewer people. As an example, on 9/9/99 you can be certain that a mass of morons played many numbers with many nines. Since the actual numbers had no relation to how many nines there are in the number you chose, you should have chosen one with no nines in it.
Anyway, the best way to bet the lottery is not to. But if you must, always choose a number with a six in it, because six is a lucky number.
An almost whole 'nother topic. Let's say that, like in "The Deerhunter," someone loads a live round into a six-shot revolver and forces you to spin the chamber, aim it at your own head and pull the trigger. The question is, what are the odds you'll be shot if you're forced to keep spinning and shooting as many as three times?
If you're thinking, "Six chambers, three attempts, must be 50%," then think again.
The easiest way to calculate this is to start by calculating the likelihood, the probablility, that you'll be alive after the first trigger-pull. That's easy: It's 5/6. The probablility, expressed by mathematicians as p, that you'll survive the second attempt is 5/6 times 5/6. The p of