From: Rick Busdiecker <rfb@lehman.com>
Date: Mon, 4 Jul 94 12:49:45 PDT
To: edgar@spectrx.sbay.org (Edgar W. Swank)
Subject: Re: Lotto odds
In-Reply-To: <sBRXoc2w165w@spectrx.sbay.org>
Message-ID: <9407041953.AA23366@fnord.lehman.com>
MIME-Version: 1.0
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    From: edgar@spectrx.sbay.org (Edgar W. Swank)
    Date: Mon, 04 Jul 94 04:05:27 PDT

    My thanks to Tim for his comments on my post:
    
        Maybe, but the state has a wonderful scam of paying off a "5 million
        dollar jackpot" over 20 years; the true value (what the same deal
        would cost you to buy as an annuity) is less than $5 M, possibly much
        less. If private outfits did this, they'd be jailed.

Publisher's Clearinghouse is a private outfit which does this.
    
    Yes, but the return is still 50%.

I have no idea whether the return on California Lotto is 50%, however
if this claim ignores the discounted value of future cashflows, that
is, the fact that a dollar that you have today is worth more than a
dollar that you will receive in the future, then it is a bogus claim.
    
        > Calculation of "x" is not "simple", since you also have to figure in
        > the 20-year (with no interest) payout of large prizes.
    
        Oh, I see you mentioned this scam. (Calculation should still be
        simple, as any spreadsheet can handle discounted present values and
        the like.)
    
    Not simple for me.  If it's simple for you (or anyone reading this) I
    would be interested in the results of the calculation.  Recall "x" is
    either the number of times the jackpot must be passed or the nominal
    value of the grand prize for which there is a positive return for the
    player (assume no prize split).  You might work this out for time
    values of money of 5-10-15% per annum.

This guesswork is unnecessary as their is an active and liquid market
for future dollars.  If your maximum prize is $10MM divided into 30
annual cashflows, you can go out to the market and price comparable
securities to determine the fair market value.  In fact, if you just
won, you can go out today and sell your future cashflows for their
discounted value.

If you want to skip the bond math, you could get a reasonable ballpark
on a lower bound by looking at the prices on 30 year treasuries, as
long as you realize that you are ignoring differences in credit risk
and cashflow schedules.

			Rick