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I am a statistician and I buy lottery tickets

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Re: I am a statistician and I buy lottery tickets

#21

Post by lylepstein »

paulsutter wrote: post #16

Insurance has an interesting comparison to lottery tickets. In a lottery ticket, the expected return is usually about 50%. Which is exactly the same as insurance (the premium is about double the expected payout). Yet people regard insurance as prudent, and lottery tickets as foolish. Me included (as long as its a risk you cant easily cover). But our explanation, that "Lottery tickets are foolish because they have a n…

I think you can classify lottery tickets as investment, wheras insurance is, well, insurance. I don't play the lottery because it's extremely unlikely to make me positive returns. I pay for health insurance because I want to cover the unlikely possibility that I have a serious health problem.

There's also the amortization to consider. Over a lifetime I may lose 50% of what I put in to insurance -- but I don't have 50% of what I'd put into it over my lifetime available to me now if I have a large medical bill to pay.

Re: I am a statistician and I buy lottery tickets

#22

Post by paulsutter »

afhof wrote: post #18
paulsutter wrote: post #16

Insurance has an interesting comparison to lottery tickets. In a lottery ticket, the expected return is usually about 50%. Which is exactly the same as insurance (the premium is about double the expected payout). Yet people regard insurance as prudent, and lottery tickets as foolish. Me included (as long as its a risk you cant easily cover). But our explanation, that "Lottery tickets are foolish because they have a n…

Unless you can sustain a $100,000-$300,000 loss before you have have paid into the insurance pool more than that amount, it makes sense. If you had gobs of money, then it wouldn't make sense for you to have insurance. (preconditioned on insurance being a profitable business, etc.)

By analogy - if a person thinks "spending $5 has no impact on my life, but winning $10M will", is that really any different from our justification of insurance? (I agree with you - thats the same way I view insurance. Yet I view lottery tickets as silly, but I can't clearly articulate why).

Re: I am a statistician and I buy lottery tickets

#23

Post by brazzy »

paulsutter wrote: post #16

Insurance has an interesting comparison to lottery tickets. In a lottery ticket, the expected return is usually about 50%. Which is exactly the same as insurance (the premium is about double the expected payout). Yet people regard insurance as prudent, and lottery tickets as foolish. Me included (as long as its a risk you cant easily cover). But our explanation, that "Lottery tickets are foolish because they have a n…

The difference is that insurance is not about the expected return at all - it's about managing risk. The "payout" from insurance is tied to events that can happen whether or not you have insurance, and which would ruin you financially without it.

The expected payout from insurance is only relevant when the above does not hold, i.e. you have enough liquid funds to cover the loss against which you're insured. A good example are non-health-related travel insurances (e.g. against cancellation expenses or baggage loss). Your argument is correct in these cases - these insurances are a net loss and cover a risk that you could simply bear. So you should not buy them.

Re: I am a statistician and I buy lottery tickets

#24

Post by Jach »

MichaelApproved wrote: post #9
wilfra wrote: post #6

Cliffs: he doesn't mind lighting money on fire because he thinks imagining winning the lottery is fun.

He doesn't think imagining winning the lottery is fun, it actually is fun for him. He's actually entertained and is comfortable spending money for a little imaging and escapism. What's wrong with that?

Lots of illegal drugs are actually fun, too. While they probably shouldn't be illegal, they can easily (much more easily than other things) lead to self-destructive life styles with the user laughing all the way. That's what's wrong with them. Similarly for becoming addicted to gambling, which at least doesn't create a chemical dependency.

Re: I am a statistician and I buy lottery tickets

#25

Post by olalonde »

afhof wrote: post #18
paulsutter wrote: post #16

Insurance has an interesting comparison to lottery tickets. In a lottery ticket, the expected return is usually about 50%. Which is exactly the same as insurance (the premium is about double the expected payout). Yet people regard insurance as prudent, and lottery tickets as foolish. Me included (as long as its a risk you cant easily cover). But our explanation, that "Lottery tickets are foolish because they have a n…

Unless you can sustain a $100,000-$300,000 loss before you have have paid into the insurance pool more than that amount, it makes sense. If you had gobs of money, then it wouldn't make sense for you to have insurance. (preconditioned on insurance being a profitable business, etc.)

You also have to consider loss aversion which is a well known psychological phenomenon[0]. In a sentence, people fee when tend to strongly prefer avoiding losses to acquiring gains.

[0] http://en.wikipedia.org/wiki/Loss_aversion

Re: I am a statistician and I buy lottery tickets

#26

Post by mrb »

jpdus wrote: post #17

The real rational reason for buying lottery Tickets is unfortunately not mentioned.. You may not think of expected return but of a Chance to move up a bracket reg "Standard of Life" which would not be possible by other means. You wont move down a bracket by buying lottery Tickets (prob not even on a long term) - which makes it perfectly rational to play the lottery for some Kind of people (in the "poorer bracket") in…

It does mention why he buys tickets: not for the expected return, but for the pleasure of entertainment.

Re: I am a statistician and I buy lottery tickets

#27

Post by WA »

"The odds against winning the big prize are 45,379,619:1"

I have a hard time imagining how low these odds are but once my math professor gave us an interesting analogy.

One person drives from Los Angeles to Las Vegas and throws a quarter out of the window at any point in time.

You then follow this person along the same route. You win the grand price if you manage to stop your car such that your front wheel stops at the exact same position as the quarter (10cm tolerance).

This image made me never play the lottery.

Re: I am a statistician and I buy lottery tickets

#29

Post by dhechols »

> So why do I still buy lottery tickets? Definitely not for the expected monetary return on investment. I think of it as a discretionary entertainment spend. I get literally hours of enjoyment from fantasizing what I’d do if I won.

Why not spend it on hookers and blow instead? THINK OF ALL THE FUN YOU'LL HAVE. :|

Re: I am a statistician and I buy lottery tickets

#30

Post by wilfra »

MichaelApproved wrote: post #9
wilfra wrote: post #6

Cliffs: he doesn't mind lighting money on fire because he thinks imagining winning the lottery is fun.

He doesn't think imagining winning the lottery is fun, it actually is fun for him. He's actually entertained and is comfortable spending money for a little imaging and escapism. What's wrong with that?

Nothing is wrong with that. When I go to Las Vegas, I play craps for the same reason. But I didn't make a massive blog post that implied I could beat craps, get it on page 1 of HN and after 20,000 words and numerous graphs and tables announce to the World that it's ok that I donate some money to Bellagio once a year because it's my money and the waitresses are hot and it's fun. I wouldn't do that because no amount of eloquent prose and statistical evidence is going to change the fact that I just stated the blatantly obvious. That's why everybody gambles.
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