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What is the “economic value” of a Mega Millions lottery ticket?

Last Updated: Mar 30, 2012  |  24 Views

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The Oxford’s A Dictionary of Business (editors, John Pallister, Alan Isaacs) [REF HF 1001.C63 2003] defines “economic value” as: “The present value of expected future cash flows [future revenues less future costs].”  See also, "expected value" or "expected monetary value", terms used in decision theory: "the future value of a certain course of action, weighted according to the probability that the course of action will actually occur."  Dictionary of Economics [eBrary]. 

For example, if exactly 10 tickets were sold for a lottery paying $50 to a single winner, then each ticket would be worth $5 (the value of the prize divided by the total number of tickets).  This is the price at which a player could guarantee coming out even by buying all available tickets at a cost of $50. 

Of course, a more complete economic analysis of a lottery ticket purchase also would take into account:

·         The number of possible combinations of numbers from which the winning combination will be selected.  In the case of the Mega Millions lottery, players may pick six numbers from two separate pools of numbers - five different numbers from 1 to 56 and one number from 1 to 46 . You win the jackpot by matching all six winning numbers in a drawing.  The probability of winning the jackpot is 1 in 175,711,536.  Each ticket costs $1.

·         Additional lesser prizes are also awarded.

·         The advertised value of the jackpot is not paid out immediately, but rather spread out over 26 years, reducing its present value (the equivalent cost of purchasing an annuity which paid out over 26 years).  If a player opts for an immediate lump-sum of cash, the payment is reduced to 63% of the jackpot.

·         Winners must pay state and federal taxes averaging 41%.

·         Since the same set of numbers can be chosen by more than one player, the jackpot may be split among multiple winners, and the likelihood of this increases as the jackpot increases.

·         There is a difficult-to-measure entertainment value to gambling, as with all game-playing; there is a further value for gambling addicts in satisfying neurological “reward centers”.

Jeremy Elson, a computer science researcher at Microsoft Research, presents an interesting analysis of this and other factors in his blog entry, “Mega Millions Odds: Can You Ever Expect A Ticket To Be Profitable?

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