Updated on 03.12.13

# Yahoo! Finance Disappoints: Powerball Jackpot Climbs To \$75 Million?

As I was surfing through Yahoo! Finance last night, I spotted an article on the front page that disappointed me greatly. Right on the front page was a link to an article with the headline Powerball Jackpot Climbs To \$75 Million!, including the exclamation point.

For those unaware, Powerball is a multi-state lottery in the United States in which players purchase a ticket that has a series of five numbers on it, plus a sixth “Powerball” number. Twice a week, winning numbers are drawn randomly and, if there are no players with an exact match, the winning amount rolls over to the next drawing. In essence, it’s a legalized form of gambling: the mathematical odds of hitting the jackpot and matching all six numbers is 1 in 146,107,962.

The appearance of such an article on a site that professes to be a center of information on how to appropriately manage your finances is a disappointment to say the least. Simply put, lotteries such as Powerball are an incredibly poor investment opportunity, no different than putting your money into a slot machine in a casino.

If you currently play Powerball (or any other lottery), I beg you to please put your money at least in a high-yield savings account, if not into a higher yield investment such as a mutual fund. Why? The average Powerball ticket loses \$0.51 for every dollar invested.. Your “investment” in a ticket costs you \$0.49, even figuring in your potential winnings.

Let’s use an example. Let’s say you buy \$5 worth of Powerball tickets twice a week. That totals up to \$520 a year. On average, you should win back \$0.49 on every dollar spent, so at the end of the year out of that \$520, you’ll have \$254.80. On the other hand, putting that same \$5 twice a week into a high-yield savings account will leave you with about \$535 at the end of the year.

If you play the Lotto because it “lets you dream,” let’s see what that dream does for you over a longer time period. If you play Powerball for 20 years at that rate, you’ll wind up with about \$5,000 in winnings. On the other hand, if you put that \$5 twice a week into a HSBC savings account earning a 5.05% APY, you’ll have over \$18,000. Which is more likely to help fulfill your dreams?

A big “wag of the finger” goes to Yahoo! Finance for this one. An article promoting the lottery does not belong on the front page of any site that professes to give financial advice.

1. Jim Lippard says:

If you absolutely feel that you must occasionally play Powerball, here’s a better strategy: limit yourself to playing only when the expected utility on a Powerball ticket is greater than \$1, and purchase only one ticket for each drawing when that’s the case. On all other weeks, put that money into savings instead of purchasing a Powerball ticket.

You calculate the expected utility of a Powerball ticket by taking the products of the probabilities of each payout combination and the amounts that would be paid out with that, and summing all of those up.

The expected utility of a Powerball ticket when the jackpot is \$100 million is \$0.34. At \$200 million, it’s \$0.68. Only at about \$300 million does it exceed \$1 (it actually occurs at a jackpot of slightly below that). At this level, if you actually purchased every combination of ticket, guaranteeing a win, and nobody else won, you would come out slightly ahead. At any jackpot level below this, if you purchased every combination of ticket, you’d lose money even if you were the only winner.

(This helps to illustrate just how bad a gamble Powerball is. Another good vivid demonstration is this Michigan SuperLotto simulator–pick your numbers, and tell it how many draws you want to do, and it will show you how often you’d expect to get 0, 1, 2, 3, 4, 5, and 6 matching numbers. You get 4 matching numbers about once every 1,000 draws…)

Lotteries are great ways to make money–if you’re the one running the lottery (one of the first money-making activities that P.T. Barnum engaged in).

2. matt says:

My grandparents gamble/play the lottery very often. They’ve already got investments, but I imagine if they kept investing their money they could have moved to someplace nice, travelled some place other than the nearest casinos, etc. or (this is a bit selfish) occasionally given a lot of money to their children/grandchildren.

They also lease new cars every 2-3 years; they have two (an Altima and a Camry) even though only one of them drives. Perhaps they actually own one of them so they can put miles on it driving to casinos or something…

3. David Syzdek says:

I see it as a tax on people who are bad at math. :-)

4. Bill K. says:

It’s a dollar and a dream. Some people place it on a lotto ticket, others go to Starbucks (and spend \$7) as a splurge. That said, I agree that Yahoo shouldn’t be promoting it on a financial website.

5. rodgerlvu says:

I see it as a tax on people who are bad at math. :-)
heh

6. XBR says:

What will you say to the people who spend \$5-10 each week on watching movie, or even more on cable and other entertainment. In your opinion, they should stop entertaining themselves and put the money into HSBC. That sucks, the biggest mistake anyone can make is putting money into stock market.

7. deRuiter says:

The reason so many poor and poverty stricken people win lotteries is that poor people play the lotteries more than middle or upper class people. Poor people say, “It’s only a dollar or \$5. or \$10.” Middle class and upper class say, “I can put a few more dollars with this dollar and save or invest, or buy something of lasting value.” It’s the same reason the majority of smokers in America are poor people, it’s a stupidity tax. Secure financially and want to bet on a lottery? Go ahead and think of it as a hobby. Lotteries and smoking are just some of the ways the poor keep themselves poor. But that is their business, just don’t come looking for handouts when you don’t win the lottery, or for free health care when you get lung cancer from cigarettes. With the new health care rationing system, and government boards to determine who gets health care, smokers will not get the same amount of treatment as non smokers.

8. Pizpo says:

I generally agree with this post; however, I disagree that it is not worth the “dream.” I value the dream. Buying only one ticket allows you to dream and represents an infinite improvement in your chances of winning compared to buying no tickets. Every ticket after the first one is a waste of money. If you re-work your numbers, I do not think \$2 a week is a killer. Plus, you get the chance of a non-statistically-conforming-event (i.e. jackpot prior to playing 146 million times).

p.s. I have not actually bought any tickets in about 10 months now. But prior to that I would buy one now and again just for the dream.

9. mathieum says:

Honestly, the lottery is a net positive for the state, which should be taken into account. At least in Michigan, all proceeds from the state lottery go into the state education fund.