## August 26th, 2009

### The math of losing money

So the Mega Millions jackpot will be up to about \$325 million for Friday's drawing. California is one of the several states that takes part in MM. The odds of winning are 1:175 million, so the expected value of a ticket is greater than \$1. Even if you take the lump-sum payout of \$205 million, each ticket is 'worth' more than the \$1 you pay for it. Of course, unless you're a fucking badass like Voltaire, it's hard to really use this fact to your benefit.
[With taxes, no doubt the ticket is worth less than \$1, but I don't understand the math of taxes.]

One interesting wrinkle is that for California players of Mega Millions, the prizes are pari mutuel, while for most (all?) other states, the lesser prizes (for matching fewer numbers) are fixed amounts.

In parimutuel betting, the total pool of bets (less the betting company's take or 'vig,' as it's known in the trade) is divided proportionately among those who placed winning bets. It seems quite simple, and it guarantees profit for the house, but a strange consequence is that the bettors don't know the odds until after all the bets are taken.

Parimutuel betting had its origins in the 19th century, but really took off with the invention of the totalizator: a mechanical (later electrical, and later still digital) device for totalling all the bets and rapidly calculating the payout. Check that link for a picture of the first mechanical totalizator - miles of wire (not for electricity! the thing was run by falling weights!) and bicycle chain.

As mechanical/electrical computation got more sophisticated, the totalizator could show automatically generated odds that changed in real-time on the Automatic Odds Barometer Indicators, or more generally the totalizator board, or more informally, the tote board.

Which is all to say that...

... though the straight odds of matching three numbers offers a \$7 payout in most states, and one would think that the huge amount of the total prize of yesterday's drawing should ensure a good payout in parimutuel California, there must have been a shitload of three-number winners (56,575 to be exact), because I only get \$6.
[it looks like these other prizes are not cumulative in the way that the jackpot is, so the prize appears to only fluctuate from \$6 to \$8, based on the take from that specific drawing and the number of winners]

Usually, I decry the lottery (as Voltaire did) as a tax on the poor, but as Laslo Hollyfeld remarks, "Lately I've come to realize I have certain material needs." And the lottery would suffice, despite the unlikeliness of winning. I can try to rationalize it with mumbo-jumbo about expected value, but mostly I'm just throwing money away on a dream. But if you also throw money away, and lightning strikes, please remember me for my kind service of introducing you to new ways to lose money.