Foreign On February 14, 2023, a new billionaire was created. This happened when the California State Lottery Commission announced that a man named Edwin Castro had won the Powerball lottery with a record-setting payout of 2.04 billion dollars. The media was quick to claim this as the largest Powerball jackpot in history in the state of California proudly showed off a large ceremonial check with the 2.04 billion dollar figure displayed prominently. However, despite the headlines, Edwin Castro never saw the 2.04 billion because he decided to take the money as a lump sum.

He was only paid 998 million, on which he had to pay 37 on federal taxes. So our lucky winner only gets 629 million dollars they can actually spend. Of course, 629 million dollars is more money than most people would know how to spend in 10 lifetimes. Once the numbers get so big, the difference between 629 million and the 2 billion dollars seems abstract.

Both numbers are too big to even wrap your head around with a seductive possibility to make hundreds of millions or even Millions of dollars. It's no wonder that half of Americans play the lottery with the average Gambler spending over one thousand dollars per year on tickets. This is despite the fact that most Americans also wouldn't be able to afford a one thousand dollar emergency expense in his dystopian novel 1984 George Orwell writes quote where the lottery was concerned. Even people who could barely read and write seemed capable of intricate calculations and staggering Feats of memory.

Winston had nothing to do with the lottery, which was managed by the ministry of Plenty but he was aware. Indeed, everyone in the party was aware that the prizes were largely imaginary. only small sums were actually paid out, the winners of the big prizes being non-existent persons. Unquo.

While Edwin Castro may be a real person, it is worth considering that the manipulative effects of lotteries may be achieved without resorting to outright fraud. as Orwell cautioned us. join us as we delve into the inner workings of government-run lotteries and find that in a lot of ways, the current systems are no less dystopian than those that Orwell imagined in 1981 Horror. This video is brought to you by MooMoo which is my commission Free stock brokerage of Choice MooMoo has a whole host of useful tools which can help you become more effective as an investor.

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These are both limited time promotions, so if you want to learn more, click the link in the description below. Lotteries are a form of legalized gambling. They are generally run by governments with the goal of raising public. Revenue The basic premise of a lottery is that players purchase tickets have a unique set of numbers.

A drawing is then held, and if the player's numbers match the numbers drawn, the player wins a prize. Almost every country in the world has some sort of a government-sponsored lottery Canada has Lotto 649, Europe has the Euromillions, and Australia has a separate Lottery system for each of its eight states and territories. For the most part, all the lotteries function in similar manners, so we'll focus the rest of this video on the largest and most lucrative Lottery Market in the world, the USA in the U.S Every state operates its own Lottery system which administers independently, but around the 1990s, some of the states had the realization that there would be tremendous benefits to economies of scale. So 45 States plus a District of Columbia and Puerto Rico joined forces to create the multi-state lottery Association which is responsible for operating the Powerball which has become the largest and most successful lotteries system in the world.

This is where the record-breaking two billion dollar prize came from this: February Anyone above the age of 18 living in a participating State can go into almost any gas station and buy a Powerball ticket for two dollars. There are five white balls, each with a number between 1 and 69, as well as one red ball at the end with a number between 1 and 26. When you buy a ticket, you can choose the numbers yourself or have them automatically assigned by a computer three times per week. The numbers are drawn.

These drawings are broadcast on local and national television stations as well as online. If all the six numbers that you choose match the numbers drawn, you win the grand prize. The grand prize starts at 20 million dollars in each round. If nobody wins the grand prize, thirty two and a half percent of the gross proceeds of the lottery are added to it until someone eventually wins.

Theoretically, there is no limit to how big the jackpot can grow. Needless to say, the chances of winning the grand prize are exceedingly low for each ticket that you buy. The chances of winning the grand prize is one in 209 92 million, but there are also lesser prizes that you can win if just some, but not all of your numbers match. You can win smaller prizes ranging from four dollars to one million dollars.

By multiplying the prize money by the probability of winning each prize and then adding them all up, you can get the expected value of a Powerball ticket. while the grand prize is not a fixed number. Based on the fact that 32 and a half percent of the gross proceeds are allocated to the grand prize, we can calculate the average grand prize is 190 million dollars. Adding these together, we get 97 cents of expected value.

A Powerball ticket costs two dollars. so the expected return is negative 52 percent. And remember that that's also your pre-tax expected return. After paying taxes on your winnings, your expected return goes down to about negative 70 percent.

You can also buy Power Play bolt-ons which give you some probability of multiplying your price by 2x 3x, 4X 5x, or even 10x. All power Play multipliers cost one dollar. Every time the numbers are drawn, a multiplier is also drawn. The probability of the lower multipliers are much higher than the probabilities of the higher multipliers.

For example, 57 of the time the 2x multiplier is drawn, the 10x multiplier is only drawn two percent of the time. We can calculate the expected value of the power play multipliers in the same way that we calculate the expected value of the Powerball ticket itself. Unsurprisingly, all the multipliers have negative, expected returns. However, what's interesting to note is that the 2X and 3X multipliers have an expected return of about negative 50 percent, The 4, 5, and 10x multipliers have an expected return of about negative eighty percent.

Despite the fact that lotteries have negative expected values, over 100 million people play the lottery at least occasionally in the US and billions of people play the lottery all over the world. So why do they do it? If you want to gamble, you can put your money into the stock market, and if you just choose some stocks randomly, your expected return is positive because on average stocks go up, or you can invite your friends to your home and play a game of poker assuming that you all have the same poker. Acumen At least your expected value is zero. And finally, you could go to a real Casino.

Your expected value will be negative, but at least if you lose enough money, the house will give you free champagne. given that there are so many seemingly Superior ways to gamble your money. So why do so many people choose to play the lottery foreign? It's well known in the world of investing that there's a trade-off between risk and expected return. For example, if you buy government bonds, there's almost zero risk of the bond defaulting, but the interest is only a few percent.

On the other hand, if you buy shares of an early stage startup, there is a high chance that the company will fail. But if it works out, your potential for upside is enormous. Theoretically, the expected value should be very high because you're being compensated for the extra risk you're taking on. with the Powerball, it's the exact opposite.

While your expected return is always negative, it gets worse the higher your multiplier is. Thus, not only are you not compensated for taking on extra risk, you are penalized, but despite this, millions of people still buy the 10x power play multipliers. People aren't dumb. The vast majority of Lottery players know full well that the expected return of a lottery ticket is negative, but they still spend significant sons of money on this game anyway.

So how can you explain this? Does this mean that large segments of the population are irrational? Determining whether Lottery players are rational is easier said than done. First off, we have to Define What rationality means? The most widely accepted definition of rationality was established in 1944 by the Hungarian and German Economist John Von Neumann and Oscar Morgenstern in their book titled the Theory of Games and Economic Behavior They Define rational Behavior as making choices that maximize their expected utility. The basic idea of expected utility is that individuals choose among options by considering the expected utility of each option, which is the sum of the utilities of all possible outcomes weighed by the probability of each outcome. So if your utility is a linear function of money, you'll maximize your expected utility by maximizing the expected value of how much money you have.

In this case, it would make no sense for you to buy a Powerball ticket because the expected value of your wealth will decrease. However, people are far more complicated than this and it is possible to think of a situation where it would be rational to play the Powerball. Let's suppose you're a parent with a single child that you care deeply about. Suppose your child is kidnapped and the only way to get him back is with a 100 million dollar Ransom payment, but you only have two dollars to your name.

The only way you have any chance of making the ransom payment is if you spend your two dollars on a lottery and win the jackpot. In monetary terms, your expected return is still negative, but you're not playing for money. you're playing to get your only child back. If your child is priceless, the expected value of the lottery ticket is infinite because Infinity divide by 292 million is still Infinity.

Thus, in this situation, it'd be completely rational to play the lottery. The previous example goes to show how far you have to stretch to rationalize a decision to gamble. For the vast majority of billions of people around the world who play the lottery, there is no rational justification. While every individual is different, we can look at the data to try to come up with some more emotional reasons why people play the lottery.

This is because low-income people feel that they are lacking in economic opportunities and the lottery is the only way for them to escape the cycle of poverty. In 2008, researchers from Carnegie Mellon University conducted an experiment with poor residents of Pittsburgh Pennsylvania. The participants were given five dollars, which they could either use to buy lottery tickets or just keep. Some of the participants were reminded beforehand that while different income groups face unequal outcomes in education, jobs, and housing, everyone has equal chances of winning the lottery.

Other participants were told nothing. Participants who were reminded about the equal nature of the lottery were almost three times more likely to spend the money on lottery tickets. This study indicates that the decision to buy lottery tickets is generally not the result of rational calculation of risks and benefits, but instead an emotional decision made by desperate people who see no other way to improve their situation. And when people see on TV Ordinary People winning hundreds of millions or even millions of dollars, they subconsciously think to themselves, why can't that be me The thought of winning the jackpot is so tantalizing that people often fail to think rationally about whether or not a lottery ticket is really the best use of their money.

Once somebody starts losing money in the lottery, they become even more desperate and double down in a futile attempt to make back their losses In many cases, until they have nothing left to lose. In the Us alone, there are at least 6 million people suffering from some sort of gambling addiction. according to the National Council on Problem Gaming Because Of The Addictive and potentially harmful effects of gambling, it is either heavily restricted or outright banned in most jurisdictions around the world. Despite this, even states that banned private sector casinos almost always operate their own government-run Lottery system.

So what can explain this apparent contradiction? The lottery is a big money maker for state governments. 2021 was a record year with gross proceeds of 105 billion dollars, a 17 increase over 2020.. So what happens to this money? Well, each state is a little different. We'll take a look at the example of: Delaware for each dollar that is spent on lottery tickets.

55 Census returns to Gamblers in the form of prizes 10 census paid as commissions to gas stations and other retailers that sell the tickets. Five cents goes to the operating cost of running the lottery, which includes advertising. The remaining 30 cents goes to the government as Revenue. However, we also have to consider that whoever wins the lottery has to pay 37 percent of federal taxes.

The after-tax prize money is only 35 percent of gross proceeds. in addition to the government-run lotteries. Delaware also allows private sector gambling gambling In the state is heavily regulated, and they've only approved three casinos on slot machines. The casinos are required by law to maintain payout ratios of at least 85 percent.

This means that in aggregate, at least 85 percent of the gross proceeds have to be paid out as prizes. All three casinos in Delaware maintain payout ratios in excess of 90 for their slot machines, which exceeds the minimum requirements. This is because they're in a competitive market and they have to keep the payout ratios High to attract customers. The Statewide and multi-state Lottery systems that the Delaware government operates have payout ratios of 55 percent, far below the minimum requirement of 85 percent that they impose on private casinos.

So this begs two questions: Firstly, why do people continue to play the lottery despite the inferior payout ratios? And secondly, how can the state justify such a low payout ratio when they have far stricter requirements for private casinos? Government lotteries, and especially large multi state lotteries like the Powerball benefit from economies of scale by pooling their resources. They can offer insanely large prizes like the two billion dollar jackpot from February of this year. Private sector casinos don't have the scale to finance such a large game. even though your expected value is worse.

Many people prefer the larger lotteries because they are mesmerized by the large prize. Secondly, government lottery tickets are much more widely available, being sold at almost every gas station and convenience store. This gives them a huge distributional advantage over private casinos. These competitive advantages allow the government to get away with offering a low payout ratio while still getting millions of people to play.

Almost every state allocates their Lottery Revenue to fund social services such as schools or veteran services. In fact, the Lottery Support of Education has almost always featured prominently in their marketing campaigns, and while these claims are technically true, they are highly misleading. Money is fungible, so it doesn't matter if you allocate your lottery money to schools, roads, or even paying for the Governor's Mansion. At the end of the day, the state's bills have to be paid somehow.

If it weren't for the lottery, that just means they would have to increase tax rates instead. 350 years ago, the French Finance Minister Jean Baptiste colber said the art of Taxation consists in so plucking the goose to obtain the largest possible amount of feathers with the smallest possible amount of hissing. Nobody likes paying their taxes, but the government needs to generate Revenue. Somehow, the ideal situation would be for people to pay taxes to the government without even knowing it.

And that's exactly what Lottery does by creating a de facto gambling Monopoly State governments are able to entice their citizens to transfer their money to the state coffers without complaining. Foreign: For all the criticism that it gets, the Internal Revenue Service is pretty efficient at raising revenue. In 2022, it collected 4.9 trillion dollars of taxes with a budget of just 12 billion dollars. This means that the administrative costs represent .025 percent of the taxes collected.

Of course, nobody likes filing taxes and many people opt to hire professional accountant to advise them according to a non-profit American Action: Forum Americans Spend an aggregate about 200 billion dollars per year on tax filing. Services While this sounds like a lot compared to the 4.9 trillion dollars of tax revenue, this only adds up to a very small percentage. If you add up the operational cost, the advertising expenses, and the retailer commissions, the total cost of operating state lotteries represents almost 30 percent of the government revenue they raise. Thus, traditional forms of Taxation are more than 60 times more efficient than the lottery.

While everyone has their own opinions about what the optimal tax structure should be, almost everyone agrees that the tax code should be at least somewhat. Progressive Wealthier people who have a greater ability to pay should be asked to contribute more to the public budget. The lottery is the opposite, as the largest burden is placed on the segments of society who can least afford to bear it. Alright guys, that wraps it up for this video.

What do you think about State Lotteries? let us know in the comments section below. As always, thank you so much for watching and we'll see in the next one. Wall Street Millennial Signing out.