1 in 292,201,338

Hi everybody,

Not sure if this is true for you, but Powerball is huge in my social circle right now.  If you’re not familiar with what’s going on, lemme catch you up.

The short explanation is that the Powerball jackpot is $1.5 BILLION currently; that’s billion with a “B”.  That’s the highest the jackpot has been on any lottery game ever.  Most Powerball billboards on the interstate don’t have room to display anything over $999 million.

My dive into the rabbit hole of how Powerball works started with a Jimmy Fallon tweet.

The hashtag #IfIWonPowerball has been trending this week.  Here’s my favorite #IfIWonPowerball tweet:
My coworkers are talking about Powerball.  My roommates are buying tickets.  I normally don’t think about the lottery, but this week it’s unavoidable.

I started to wonder: How can an organization give away $1.5 billion dollars and still exist?

I’ve never played Powerball, so I don’t really understand what it’s like to buy a ticket until I looked it up today.  Let’s start there.

Your lucky numbers are…

The Powerball drawing has five white balls and one red ball (the powerball), for a total of six numbers you need to pick on your ticket.

The five white balls come from one big bin of 69 balls, so the numbers you pick for those five need to be somewhere in the range of 1-69.  The white balls are picked without replacement, meaning no numbers will be repeated in the five white picks.  The order of the numbers doesn’t matter; they just get listed on your ticket in numerical order.

The red powerball comes from a completely separate bin of 26 red balls, so you can pick any number 1-26 for the powerball.  Since it’s completely separate from the white balls you could pick a powerball that is a duplicate of one of your white picks.

You pay $2 for your ticket (or $3 if you want to play Powerplay, which I’ll explain later).

Then once you have your numbers, you wait until the drawing.  These happen twice a week on Wednesday and Saturday at 10:59 pm.  They look like this:

“So you’re telling me there’s a chance?”

If all your numbers match then you win the jackpot, that’s the simplest part to explain.

But you can also win lesser prizes.  Even if just a few or even 1 of your numbers matches the chosen balls you can win.  For just matching the powerball alone, you win $4, doubling your investment.  If you match 4 numbers out of the 6, you win $100.  4 white and the powerball? $50,000.  Get all 5 white correct and you win $1 million.

This is where things get interesting.  If you pay $1 more and buy a $3 ticket, you can double, triple, or 5x those lesser winnings.  These are called “powerplay” tickets, and instead of $4 for example you would make $8, $12, or $20, depending on the night and whether 2x, 3x, or 5x gets randomly chosen.

When you factor in the lesser prizes, your overall odds of winning something are 1 in 24.87.

Your odds of winning the jackpot, however? 1 in 292,201,338.

If nobody wins the jackpot, they roll over the jackpot amount plus the new tickets into the next drawing.  That rollover is how we got to $1.5 billion.

Sidebar: If you’re going to play the Powerball

  • First, don’t expect to win anything.  Remember that 96% of the time you will be throwing away $2.
  • Second, do not pick the powerplay option.  Statistically it increases your liability more than it increases your expected benefit (pay $1 more to get only ~$0.82 of expected value if it’s a 5x multiplier that night, and most of the time it’s not a 5x multiplier).
  • Third, the best time to buy a ticket is when the jackpot is between $400 million and $600 million, after that too many other people start buying tickets and the chances of your sharing the prize go up drastically.

    Still, for every $2 ticket you buy, you can only reasonably expect to win $0.85. (See below)

So what is this organization that has $1.5 billion just laying around?

Powerball is run by the Multi-state Lottery Association (MUSL), and they don’t have $1.5 billion laying around.  44 states, DC, and the Virgin Islands sell Powerball tickets and contribute to the pot of winnings.  They also get back the earnings.

But the winnings aren’t $1.5 billion handed to you in cash.  Instead, they put the winnings into an annuity that pays every year, with a 5% increase every year.  Over 30 years, this annuity is worth $1.5 billion, pre-tax.  You can ask for straight cash, but that’s at a serious markdown.  For example, this week’s cash option was worth only $930 million, pre-tax (yes, I just wrote “ONLY $930 million” seriously).

And in order to protect the organization, the winnings are calculated based on market performance, ticket sales predictions, and overhead.  The jackpot is really only about 1/3 of Powerball’s budget.  And Powerball’s budget doesn’t include the lesser winnings ($4 – $2,000,000), because those are paid by the participating states.

The lottery has a pretty sweet deal.  MUSL’s director, Chuck Strutt has been working for the organization since its founding in 1987.  I don’t blame him.  If my job were selling pieces of paper that are mostly worthless and having millions of people buy them then that seems like a good gig.

And this brings us to the part that blew me away.  Since the jackpot began building on November 7th, lottery officials estimate that Powerball sold 1.55 billion tickets!  For Wednesday’s drawing alone, they sold 371 million.  When you realize that tickets sell for $2 or $3, and the winnings are paid over 30 years, you can see that Powerball isn’t exactly struggling to get by.

This is where things get confusing, because MUSL is a non-profit.

All dat cash tho…

MUSL can’t make a profit; it’s part of the deal when you’re a nonprofit.  They also have to satisfy the states that support Powerball and their other games (normally states wouldn’t like lotteries and gambling).  So MUSL and Powerball only operate and facilitate the games.  They do not take in the assets from tickets.  They only administer the jackpot winnings and coordinate the games between all the member states.

State lotteries pay all employees and take in all revenues.  Proceeds from Powerball get returned back into state budgets after paying the costs of running the lottery in the state, pitching in for the jackpot, and contributing to MUSL’s operations costs.  About 1/3 of ticket sales is returned to state budgets. This money gets used for all kinds of things.  Most notably though, states use the money for education.

(It’s always seemed ironic to me that we have “education lotteries.” If we had better education, maybe people wouldn’t play the lottery because they’d understand probability, or so I thought, but there are other reasons to play the lottery than thinking you’ll win and I’ll talk about those in a minute.)

Here’s the breakdown of proceeds for DC, where I live:

While MUSL can’t make a profit, each state lottery can and is expected to make money.  One study in 2008 found that lotteries contributed $77.8 billion to state budgets across the country.

Here’s how that compares to other ticket sales (2014).

It’s actually kinda messed up

Originally, money made in state lotteries was supposed to supplement the state budget.  In many states, though, legislators have cut taxes and rely on lottery proceeds to replace tax revenue.  While this might seem great in theory (people who have extra money and choose to spend it on the lottery can afford to pay for public services), in practice study after study have shown that those of low socioeconomic class and racial minority are the most likely to play the lottery and play it heavily.

  • In North Carolina, the poorest counties lead the state in lottery sales.
  • On average, poor people spend 9% of their income on lottery tickets.
  • One survey found that 21% of Americans believe the lottery is the most practical way to wealth.

When we use lottery revenues to replace tax revenues, it cuts taxes on the rich while the poor and non-white foot the bill.

While it’s clearly a problem that people think the lottery is a practical way to wealth, I don’t think playing the lottery is purely about wealth.

It’s also about hope

There’s something about a lottery ticket.  Even though you know you’re probably not going to win, there’s still hope that you could.  And sometimes that hope is enough.

That’s not to mention the trash talking that you can do with your friends about how good your numbers are and how awful theirs are.  Or the rush you get when the numbers are being picked.

The lottery strikes deep in a way.  We dream about the way things could be if only we had a million dollars… or $1.5 billion.  It takes us into the realm of hopes and dreams and the ideal life.

Last night, while talking with my roommates about the lottery, we started listing the things we would do with the money.  Some things were jokes, but others were very real wishes: “I would want to travel,” “I would want to buy a boat,” “I would want fame in public and a house that’s entirely secluded.”

I realized last night that a lot of those “would wants” that we talk about in the context of winning the lottery are actually just “wants.”  Thinking about the lottery can expose something about what you want in life.  Maybe that’s the value of the lottery ticket – not the money that you almost certainly will not win – but the chance to daydream about a better life.

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Have a good week,
-B