Had a guy tell me that the lottery wasn’t selling tickets, it was selling “hope”.

Personally, I’m wit youse. I buy a scratch-off once in a while, but don’t mess with the lottery unless the value of the prize exceeds the probability of winning–i.e. expected value is positive.

In Calif, the division of money used to be 50% to winners, 34% to schools, 16% to overhead. That tells me that the payback percentage is 50%. In Reno (which I used to frequent) some of the slot machines are advertised to have a payback ratio of 98% or even 99%.

I had a storekeeper in Oregon tell me that he only made 5 cents on each ticket sold, that it was only 5% and it “wasn’t enough”. He said that the seller had gotten together and were going to demand more.

I asked, “How often do you turn over the stock?” He replied, “About once a week.” To which I responded, “My gawd, man, that’s 250% per year on a dollar ticket.”

He looked at me and said, “It isn’t enough.”

I felt like saying, “It never is.”

always,
tony

The chances of winning the California lottery is about 1 in 175 million. It’s a combinatorial problem. The number of ways you draw 5 numbers from 56 is 56 choose 5, or

56 x 55 x 54 x 53 x 52 / 5 x 4 x 3 x 2 x 1. or about 4 million. So, the probability of you picking 5 winning numbers out of 5 drawn is about 1 in 4 million. Additionally, you must pick the “mega number” from the numbers 1 – 46, so multiply the 4 million by 46.

Interestingly enuff, before they had the mega number, it was interesting to watch the volume increase as the expected value became positive. Hence, if the probability was 1 in 10 million and the prize was 11 million, the number of tickets went up dramatically. It was “interesting” because although the expected value was positive, as more and more folks bought tickets, the probability of SHARING the prize went up.

If you could have been assured that you wouldn’t have to share the prize, it would have paid you to purchase enough tickets to complete blanket the output space and thus assure yourself of being a winner.

I’ve never really worried about Black Swans, before nor after learning the meaning of the term. Nothing new about the idea. If a fella worried about Black Swans, he’d never climb into a danged ol’ race car, ’cause that wall never gets softer. Of course, one way of looking at it is that eating concrete is a 100% probability if you stay with it long enough. Mario Andretti made the definitive comment. “There are two kinds of drivers at Indy. Those who have hit the wall, and those who will hit the wall.”

The mathematical reality is, the more you buy the greater your losses will be.

This is one where Adam Smith got it 100% correct. Paraphrasing what he wrote, “If one adventures (purchases) upon all the lottery tickets, you will most certainly loose nearly all your money.”

Why is this so? BECAUSE while the lottery may say a jackpot is worth 10 million, they do not divulge the actual TOTAL AMOUNT they have taken in for that particular jackpot. The prize may be 10 million but they have actually taken in a sum far greater than actually published.

So, if you buy all the tickets, you will “win” the 10 million, but most likely loose 30-50 million before arriving at the 10 million dollar ticket.

Simply, the lottery odds maker controls the mathematical odds and they are in his favor, NOT yours.

Regards,
Dave

Here’s an utter situation I probably should have included. You generate a bunch of events and cherry pick from the results. Much like a stock advisor that makes a hundred recommendations, then chooses to report the 3 that made money.

Wot’s the old joke. A guy gets a letter in the mail. It says, “Buy stocks A, B, C.” He, of course, ignores it. The stocks double.

A month later, he gets a letter saying, “Buy stocks D, E, F.” He of course, ignores it. The stocks double.

A month later, he gets a letter saying, “Buy stocks G, H, I.” He thinks about it, then chooses not to buy. The stocks double.

A month later a guy shows up at his door and says, “I told you to buy three sets of three stocks. Had you bought them, you would be rich. I’m tired of giving you free information you won’t act on, so I’ll SELL you 3 more picks for $10,000.

What the “mark” doesn’t realize is the guy sent out 100,000 letters to 100,000 people–all with different stocks. Then after the first results came in, he sent out 10,000 letters to the “winners”–again with different stocks. At the end, he only had 10 people to “visit”.

In like manner, I’ll sell you my “lucky penny” for $2,000. This penny has predicted every presidential election since 1860. I started with a vast number of pennies and said “heads, Republican; tails, Democrat”. I threw them in the air and half came up heads, and half came up tails. Since Lincoln (a Republican) won the 1860 election, I threw away all the pennies that came up tails, and flipped them again. Lincoln got re-elected, so I threw away all the pennies that came up tails and flipped them again. I kept this up until I reached the 2008 election. I had two pennies left. One came up heads, the other tails. I call the one that came up tails my lucky penny since it had predicted every election since 1860. I’ll flip in next year and bet the farm on what it predicts the outcome will be.

always,
tony

No, I haven’t read the Nassim’s book, but I’ve read about it and corresponded with him.

His thesis, while somewhat correct, has some problems. For one thing, if you presume that NOTHING is “predictable”, then planning is not possible. MOST events are “linear” over a range. Hence, don’t let his thesis blind you to the fact that while past performance does not necessarily predict future performance, past performance is usually the best indicator we have. While some unpredicted and unpredictable event can distort the present “reality”, it don’t happen too often.

Wot’s the old joke. If you want a laff on Wall Street, just say, “It’s different this time.”

As I sed in an interview once, after being asked if I made mistakes. “I’ve made many mistakes, but I seldom make the same mistake twice, and only once did I make it the third time.”

The guy looked puzzled and asked, “What was that mistake?” I replied, “I loaned a friend $3,000, and lost it all–including the friend.” The guy said, “How is it you made the same mistake three times?” To which I replied, “I loaned it to him a thousand dollars at a time.” Often, the past is the best predictor of the future you have.

always,
tony

Tony, nice article. As a kid (High school-still fresh) I used to feel the need to correct people or explain their error. This did not make me very popular, as you can imagine. Eventually, wanting to “fit-in” I became equally sloppy. One of the things I like about the Ring is the overall level of awareness of FACT and context which can lead to a higher degree of TRUTH/understanding. As Lynne might say, “Reality just is.”

That being said the reporting of numeric information usually tells you more about the reporter than the situation reported on. Which reminds me of an old joke.

A hot air balloonist had some trouble with his burner and drifted off course on decent. He spots a gentleman on a bycle and hollers down to him, “Hello sir, can you tell me where I am?”
The gentleman looks up and yells back, “Yes, you are about 100 feet above me!”
The balloonist replies, “You must be a physicist!”
Flattered the bicyclist answers back “Why, yes. How did you know?”
The exasperated balloonist shoots back, “Well, because you are absolutely correct and totally useless!”

One last thought, and this one has tripped me up now and then. A percentage appears smaller in a contracting environment than an expanding one for the same amount of change.
Example:

Buy a house for 100K. Real Estate appreciates 100%, the house is “worth” 200K. Something changes, say Barney Frank is in charge, and Real Estate depreciates 50%. The same house is “worth” 100K, again. The value change in both cases is 100K. Same thing is true of stock market portfolio valuations, GDP growth and unemployment/employment rates.

Cheri