Earlier this year, the Powerball lottery hit a jackpot of over $1 billion dollars. The news was in a frenzy. People were in a frenzy. The thought of winning that much money had taken hold of many. They were dreaming of the cars, boats, houses and jets they would be buying. They quickly envisioned walking into work the next day and telling their boss off and quitting (or just not showing up at all!). Clearly, there are unknown things most people don’t understand about the lottery.
Things You Need to Understand Before Playing the Lottery
The odds of winning were 1 in 292 million, which means the odds of winning were slim. So why do we play the lottery? The goal here isn’t to get you to stop playing the lottery, but rather to gain a better understanding about the lottery so that you can be smarter with your money and hopefully one day achieve your financial goals.
1. The Urge For Instant Gratification
In today’s world, we crave instant gratification. Everything is at our fingertips and we don’t like to wait. When we do have to wait, we get upset. The lottery is a great example of us wanting instant gratification. When you look at it, you could become a multi-millionaire in the course of 5 minutes. How awesome is that? The only catch is the odds are against you.
If you took the time to save 20% of your income every month and invested it for the long-term, the odds are much better that you would eventually become a millionaire. But, as I pointed out above, we don’t like to wait. We don’t want to become a millionaire when we are 60 years old; we want that amount of money today. So we let our imagination run wild and play the lottery even though the chances of us hitting the winning numbers are slim.
2. We Can’t Fathom The Odds
So if the odds are so against our favor, why do we still play? The reason is because we cannot comprehend the odds. This isn’t saying we are dumb or stupid, but rather humans just aren’t designed to be able to calculate what 1 in 292 million really means.
Think about it: when in the history of mankind would we have to ever understand the probability of something like this? Even back when we were hunter-gatherers, the odds of 1 in 292 million never came up.
So now when we see the odds like this, we dismiss them and just focus on the idea that someone has to win. We then turn that into a belief of “why not me”? So we play. We play because we have a chance. If the odds were 0 in 292 million, I bet no one would play. But being 1 in 292 million, we rationalize this and play. Because there is a chance, we don’t want to miss our “opportunity” by not playing.
3. We Trick Ourselves
When we do play the lottery and match 3 or 4 numbers, we trick ourselves (or better yet, lie to ourselves) that we were close to winning so we have to play again. After all, if we were this close now, we have a shot at being even closer next time.
The reason this is a trick (or a lie) is because when the next lottery drawing comes, it has absolutely nothing to do with the previous one. Just because you matched 4 numbers last time doesn’t make you any closer or better your odds of matching all of the numbers this time. It’s a completely new drawing and any combination of numbers can come up.
In other words, you have a 1 in 292 million shot just like before. The odds are not better because you were close last time. There is no correlation between the two drawings.
4. We Look At The Short Term
Another thing we don’t understand about the lottery, we drop $1 or $2 every time in hopes of winning millions. Ironically, when we are close to winning, we think this means we have better odds (as I just pointed out) but we take the opposite outlook when it comes to the money we spent to play.
Explained another way, we see the $1 or $2 as a one-time event. We never take the time to add up just how much money we spend when we play the lottery. If we play $2 every week, that’s over $100 a year we spend on lottery tickets. It doesn’t sound like much, but after a few years it starts adding up.
If you instead took that money and invested it, you would come out much further ahead down the road. But again, it all goes back to the first point about instant gratification. We would rather trick ourselves into thinking we have a shot at being a millionaire and spend that $1 or $2 now than save it and wait.
I didn’t write this to tell you to stop playing the lottery but rather to help you put it into perspective. When the Powerball was over $1 billion, I dropped a few dollars to play. But I did so more as something fun and to dream, not really expecting to win. After all, I had a better shot of getting stuck by lightning.
The point is to understand more about the lottery and how it’s designed to get you to play – by getting you emotionally involved in the game. The sooner and better you are at understanding that you have better odds of millionaire status by saving and investing, the better off you will be financially.
I realize it isn’t as fun or glamorous to save 20% of our incomes for decades, but that is the reality of it. You can either be disciplined and save and have a good shot at becoming a millionaire, or you can spend all of your money on the lottery and be almost certain that you will never become a millionaire. Or a billionaire.
Again, I’m not saying to never play and have some fun, but just to realize that you shouldn’t be setting expectations of winning any time soon.
Do you play the lottery?