An honest question: Why don't hedge funds buy lottery tickets?
I am a statistician and I buy lottery tickets
51–60 of 108 posts
Re: I am a statistician and I buy lottery tickets
#52Kari Enqvist, a professor of cosmology, said something very insightful in an interview about gambling in general: "Insurances yield a peace of mind and lotteries yield dreams, the values of which cannot be measured in mere terms of probabilities or money." In my view, lottery tickets are not meant to be rationally justifiable, nor should they be required to be. Yet, I don't fancy the idea of committing to such vain p…
Also, in Finland the state lottery redistributes the profit to good use. By law the arts get 38.5%, sports 25%, science 17.5% and youth work 9%. 10% goes to whatever the Ministry of Education decides that year. Whenever I play lottery I think I'm partly giving money to charity and partly buying a dream.
Re: I am a statistician and I buy lottery tickets
#53Insurance 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…
Insurance pays out when you lose your job or crash your car; ie, when you get unlucky. Lotteries pay out when your pick of numbers was a better pick than ten million other people; ie, when you get lucky.
Economics has repeatedly suggested that the natural logarithm of dollars is an approximation of the utility of money.
When you're lucky, you go from 50k to 50m. In logarithms, 10.819 to 17.727. When you're unlucky, you go from 50k to effectively 0. Which is 10.819, to negative infinity - but probably, you'll have enough to live on, so like 1 (0). So you gain almost 7 utility for playing the lottery, but lose more than 10 for not playing the insurance. (The closeness of seven and ten explains why so many uninsured people play the lottery.)
Re: I am a statistician and I buy lottery tickets
#54Insurance 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…
Insurance pays out when you lose your job or crash your car; ie, when you get unlucky. Lotteries pay out when your pick of numbers was a better pick than ten million other people; ie, when you get lucky. Economics has repeatedly suggested that the natural logarithm of dollars is an approximation of the utility of money. When you're lucky, you go from 50k to 50m. In logarithms, 10.819 to 17.727. When you're unlucky, y…
Have any links that expand on this idea?
Re: I am a statistician and I buy lottery tickets
#55I had a statistics professor at college who were addicted to gaming. There were stories about him losing a lot of money, car, job and wife because of his addiction. I thought it were just a joke, you know, statistics professor addicted to lottery? Duh, I wouldn't fall for that. Until one day, to demonstrate that a specific class of combinations were too rare, he challenged a girl in the first row that if she rolled a…
Interesting you should say that. Richard Feynman on education in Brazil: http://v.cx/2010/04/feynman-brazil-education ..and the associated HN discussion: http://news.ycombinator.com/item?id=2483976
I loved Surely You're Joking Mr. Feynman! But to be fair, it was written nearly 30 years ago. I would hope things have gotten better since then.
Re: I am a statistician and I buy lottery tickets
#56I also have a background in statistics (to a degree) and gamble but prefer deep OTM puts to powerball.
Re: I am a statistician and I buy lottery tickets
#57Insurance 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 e…
Exactly. If risk is defined as financial uncertainty, then lottery tickets and insurance are in fact complete opposites with regard to managing risk. Insurance is designed to minimize financial uncertainty and lottery tickets (gambling) to increase it.
Re: I am a statistician and I buy lottery tickets
#58Earlier quoted context omitted.
Interesting you should say that. Richard Feynman on education in Brazil: http://v.cx/2010/04/feynman-brazil-education ..and the associated HN discussion: http://news.ycombinator.com/item?id=2483976
I loved Surely You're Joking Mr. Feynman! But to be fair, it was written nearly 30 years ago. I would hope things have gotten better since then.
Not really, no
Re: I am a statistician and I buy lottery tickets
#59The 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.
Well it mentions why he 'says' he buys tickets.
>The standard argument of people who think that lotto is for suckers is based on expected return. They are taught at school that a rational investment is one with an expected value greater than the price paid. I have some problems with this argument, but I’ve never really calculated it before, so let us consider the numbers. //
This para to me says he's not really looked before at why he buys tickets, he's certainly not calculated his expected returns even though - as he says - he's a statistician. That seems a bit weird to me, like a mechanic that doesn't check his own oil or something.
So I think he now has a reason to tell people why he buys tickets but that perhaps before [and maybe still] there was some irrationality (humanity you might call it) in there too.
>I’ve also heard the belief that the lottery is a tax on poor people. I have a different view, that buying lottery tickets is perfectly rational for me. //
At the start he says this. And then, like others in this thread, says it's about hope and dreams - that seems contradictory in some sense. It's about hope beyond the mathematically expected financial return? The cost of doing the lottery for me exceeds the entertainment value it provides but the draw of the chance to "solve all my problems" is very strong.
Perhaps not a tax on the poor but a far less easily avoided irrational expense?
Aside: I also like the way he presents his calculation of expected return as if it's going to turn out that the lottery makes an ongoing loss and it's going to show that he was acting rationally all along (although it wouldn't show that of course because you have to have the argument first for the behaviour to be rational, don't you; otherwise it just happens to be coterminous with rational behaviour).
Re: I am a statistician and I buy lottery tickets
#60Earlier quoted context omitted.
It does mention why he buys tickets: not for the expected return, but for the pleasure of entertainment.
Well it mentions why he 'says' he buys tickets. > The standard argument of people who think that lotto is for suckers is based on expected return. They are taught at school that a rational investment is one with an expected value greater than the price paid. I have some problems with this argument, but I’ve never really calculated it before, so let us consider the numbers. // This para to me says he's not really look…
You must not have got to the end of the article? He doesn't need to have ever figured out the odds before when he was always just buying it for the entertainment value.
>I think of it as a discretionary entertainment spend. I get literally hours of enjoyment from fantasizing what I’d do if I won.