What Can Investors Learn from State Lotteries?

On a recent trip to Wisconsin we chanced upon a television commercial for the Wisconsin Lottery. It was insidious, offensive, and probably effective.

The commercial was for a crossword scratch game, the kind where you can be an instant winner. It showed a nerdy guy doing a regular crossword puzzle, and then turning his skill to the lottery version. He was a winner.

Here is a look at the card:

If one looks at the back of the card, there is a different message. The overall return on this "investment" is 3:7 to 1 against the player.

Overall Odds	1:3.7
Odds	$5 1:7 $10 1:16 $15 1:61 $20 1:51 $25 1:50 $50 1:90 $100 1:1,500 $500 1:44,445 $5,000 1:600,000 $50,000 1:600,000

We purchased a ticket and got an "oh, so close" experience. When we inquired about the game, the vendor asked, "How many?" He was surprised that we took only one.

There are several themes here:

1. The "investment" appeals to someone who needs/wants to hit it big;
2. There is an illusion of skill in the game;
3. There is a poor perception of the actual chances of victory.
4. The game itself is designed to nurture the worst instincts of the player.

Other Lottery Examples

There is an occasional case where a lottery has a positive expectancy because of a carried-over jackpot. We remember when a group of bored CBOE traders sent a clerk to O'Hare with instructions to fly to Pittsburgh. He went to a nearby lottery vendor and bought tickets for hours before flying back. No luck, but at least the play had edge, even with the cost of the plane ticket.

Normally the lottery is a straightforward losing proposition. Despite this, various promoters offer lottery strategies and analysis of the "tendencies" in various state lotteries. The vendors of strategies use the terminology of successful players in other sports, e.g., they "wheel" a key number.

Over twenty years ago there was a publication called Gambling Times. Most of the authors wrote about games where it was possible to achieve a positive expectancy -- sports betting, blackjack, horse racing, and poker. There was some treatment of craps, where you could get a lot of play while losing little edge by following "best" strategy.

And then there was the lottery "expert". She was something of a joke with the other authors, since everyone knew that her methods had no edge. The magazine ran her columns because they were popular, not because they provided any "investment edge."

There was one quotation, going something like this ----

"In the Pennsylvania Lottery, certain numbers like to come up with their near neighbors."

Wow! What an incredibly dumb statement! This was long before Fooled by Randomness, a book we liked so much that we bought multiple copies as gifts for clients. Anyone who understood odds knew that this claim was completely bogus. It was an early example of the fact that people can see patterns in anything.

Whatever one thinks about the methodology, this was a successful business model. She now has testimonials from many winning players, used as evidence for her newest work. No one knows how much was invested to generate those winners since losers do not write letters.

Lessons?

It is our expectation to draw upon this article, showing the similarities with many other investment decisions and the sort of information provided in support.

While we have strong feelings about the public policy implications of states exploiting the poor for additional gambling revenues, that is not our focus. We write about investments and about how people can get the information they need.

Meanwhile, we invite reader suggestions for their own similar experiences.

Comments

[Maxe Paul:]

Maybe you should come visit us in Australia sometime, we have a news agent, pub and club on nearly every corner and all have either poker machines, bingo (keno), horseracing, lotteries, scratchies (scratch games), sports betting, and absolutely none of them offer any reasonable odds at all! Oh and if you missed out on a scratchy you can even pick them up at some chemists (pharmacy)!!!

Look on the bright side though, we are the only developed country in the world not in a recession, LOL.

Jun 05 03:42 AM

[TinyTim:]

"public policy implications of states exploiting the poor for additional gambling revenues"
glad you put that in even though it's not the point.

My own experience is with PowerBall. I ignore it until it goes over $150M. I have the probably deluded notion that above this level, at a buck a pop, there are positive expectations, an edge. Only buy five & let the computer pick 'em.
Since this only happens once or twice a year, I feel like less of an idiot. Except if I get hit by lightening on the way out of the convenience store.

Jun 05 10:56 AM

[ain't no fo...:]

It would be interesting to see how much state unemployment payout is recycling right back into the state coffers these days as desperate unemployed people figure they "have nothing to lose" by taking a chance on the siren call of the lottery.

Ever notice how keno machines are always conveniently located in the bar area of pubs and restaurants? I wonder why...

Jun 05 11:09 AM

[John Lounsbury:]

Jeff - - -

We are all gamblers. Many of us try to find the off-setting hedges to limit possible losses. We like to think we are betting on gaining a share of a growing pie. There are times when the pie shrinks and then the hedges that depend on a growing pie to be effective let us down.

Someone wants to debate the statement: "We are all gamblers"? I offer these thoughts -

1. To the guy who says he doesn't gamble because he keeps his savings in risk free investments, I say: You are gambling with inflation.

2. To the guy who says he doesn't gamble because he doesn't save, I say: You are gambling with deflation.

3. To the guy who says he doesn't gamble because he has a good asset allocation, I say: You are gambling with history repeating.

Even life is a gamble, but its a gamble worth taking.

Good luck!

Jun 05 01:02 PM