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Fri March 30, 2012
Is The $540 Million Lottery A Good Bet?
Originally published on Thu May 24, 2012 8:43 am
So, say you were a billionaire. And through some kind of billionaire magic you could buy 175 million different tickets, which cost $1 each. This would give you every possible combination of numbers.
You spend $175 million, and you are guaranteed to have a winning ticket to a $540 million lottery. Is it a good bet? In other words, is the expected value of each $1 ticket greater than $1?
There are three reasons for this.
1. You don't get all the money all at once.
The jackpot is paid out over 26 years. And the promise of a dollar in 26 years is worth significantly less than having a dollar in your pocket today.
But the winner can choose a lump sum payment of about $390 million. Still way more than the $175 million you invested. But even if you took the lump-sum payment, you wouldn't actually wind up with $390 million.
2. You'll probably have to share the jackpot
If more than one person has the winning combination, the jackpot gets split up. Economist Stephen Bronars estimates that there are likely to be two or three winners. So let's say there are two winners. They each get $195 million. Still a healthy profit on that original $175 million investment
3. Your winnings are taxable.
The WSJ estimates that you'll pay 40 percent of your winnings in taxes (more or less depending on what state and local taxes are like where you live). So from an original investment of $175 million, you're left with $117 million.
For More: The Two-Way has a MegaMillions roundup.