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This story is quite common. The obvious conclusion is that a large infusion of money can ruin someone. But it occurred to me recently to wonder if there’s a sel

This story is quite common. The obvious conclusion is that a large infusion of money can ruin someone. But it occurred to me recently to wonder if there’s a selection effect where people who are bad with money are far more likely to buy lottery tickets. People who are bad with money can waste whatever quantity they are given. Someone like that isn’t going to get a lot happier with an infusion of cash. Or rather they would with a gradual infusion over time coupled with some training and discipline. 3 things which are deliberately avoided in the framing of the lottery.

WorldMaker 8y ago
The interesting part is that lotteries are investment schemes of a sort and designed for gradual payouts more akin to an annuity. The jackpot numbers always include a disclaimer that that would be the total winnings over the lifetime of the payout of that "investment product": immediate payouts are considerably smaller and not just because they involve more taxes. (Obviously it is in the lotto's favor to often spin it as entirely taxes and fees, rather than admitting that it's an "investment" product that they "sell" to "buyers" where the large dollar figures are based on a time-value-of-money calculation.) The number of contestants that take the lump sum up front instead of treating it like an annuity to supplement their lifestyle over time is staggering, and also indeed another likely indicator of the selection effect that the people most likely to play the lottery are the least likely to have good investment advice in their lives.
- goatlover 8y ago
  The first thing I would do is seek legal and financial advice before telling anyone or deciding anything. I might also temporarily relocate to an undisclosed location with being on vacation as my excuse.
- mobilefriendly 8y ago
  It is very prudent to take the lump sum. Future tax rates are likely to be higher and there's potential for a future government debasing the currency and the winner seeing the payouts eroded by high inflation. There's also a remote chance the lottery or payment provider fails or is nationalized in some political act. You also can better plan your estate if you control the asset outright.
  - WorldMaker 8y ago
    Yes, there are situations where getting the lump sum is more prudent, but it shouldn't be the default in the average case. It is sometimes possible that you can find a better annuity or investment product to invest the lump sum in yourself and make back the lossage of the asset's interest/share in future lotto profits included in the longer term investment product, but that requires analysis and comparison, with good financial advice to reach that conclusion. But the keyword is "sometimes", everyone has different investment needs, and overall strong, steady passive income is often preferable to lump sums, especially without good financial advice to rely on to manage it. Regular Lotto payments, even fixed ones, are some of the least likely assets to default (historically tend to be quite stable/secure) you can have if your threat model includes future governments debasing currency or high inflation. It's sad how strongly inversely correlated bad economies are to higher lotto activity. (Now, if your threat model includes future governments strongly prohibiting gambling and gambling payouts, that's a different matter.)
    - gizmo686 8y ago
      The lottery is still a single asset (even if it is backed by a diversified portfolio). When we are talking about hundreds of millions of dollars, I would be willing to pay a premium to hold that money in a more diverse way. This is the same reason I prefer 401ks to pensions (and our government has not demonstrated an ability to start with a fixed fund and not raid it for unrelated purposes) For your threat model question, I would be much more concerned about the state raiding the lotto fund to pay for, say, their pension obligationd than I am about them retroactivly banning lotto winnings on moral grounds. It is much harder for the state to steal from investments it doesnt control.
- MarkMc 8y ago
  Reminds me of the time Warren Buffet's company insured a gambling company against a "billion dollar" payout [0]. Buffett noted that the insured value of the payout was far less than a billion dollars because the payout was spread over 40 years and joked that the gambling company rejected his advice to spread the payout over a billion years - paying $1 per year. [0] https://www.insurancejournal.com/news/national/2000/10/03/11427.htm https://www.insurancejournal.com/news/national/2000/10/03/11...
- scott00 8y ago
  Taking the lump sum is not at all indicative of a lack of good investment advice. Going with the installment payments is equivalent to taking the lump sum and then investing it all in US treasury bonds. That's an extraordinarily conservative investment strategy and most investment advisors would recommend something more aggressive.
  - WorldMaker 8y ago
    It's more that that the ratio is so out-of-tune with the ratio of investors whom should be getting conservative investment strategy advice at the decision point in question. The qualifier here may be "good investment advice". Most investment advisors would recommend something more aggressive, but they also get paid a lot more in that case, that doesn't necessarily correlate with "good advice".
  - fjsolwmv 8y ago
    Getting a surprise $100M is different from managing your portfolio. Aggressive means easy to lose it all due to ignorance or fraud. Getting a dozen mulligans via installments is good insurance against losing it all.
    - scott00 8y ago
      > Getting a surprise $100M is different from managing your portfolio. It's really not that different. All of the advice out there concerning how to prudently manage a portfolio of $100K applies pretty well to $100M. Going up to the $100M opens up some additional options (private equity, hedge funds, venture capital, real estate) and involves some additional taxes (estate/gift taxes), but you could do a lot worse with your $100M than sticking 60% in low cost equity index funds and 40% in low cost bond index funds and ignoring alternatives and tax optimization. > Aggressive means easy to lose it all due to ignorance or fraud. More aggressive than ultra-conservative does not mean aggressive in an absolute sense.
MR4D 8y ago
There is a selection effect. It’s actually well documented [0] that poor people buy more lottery tickets than people richer than them. Not just as a percent of income, but also absolute dollars. From a behavioral perspective, I doubt that most Americans are well suited to winning a lottery and being able to manage that transition well. Just look at all the bankruptcy stats on lottery winners. [1] I work with people who have a lot of money. It’s part of my job. And although I’m not rich, im not suffering either. But this week as I reflected with my wife on what winning a billion dollars would be like, the thought that it would rip you out of whatever reality we currently live in and plop is into another reality is inescapable. For instance, I want to enjoy the money. That means I’m never flying coach again. But if I’m flying my family around the world first class, who do we go with? Our friends don’t have that kind of money. So would we pay for them? Ok, then when do we stop paying for others? (Before the money is all gone). And how does it affect the friendship when one friend is paying for everything the other one enjoys? The dynamic is weird, and probably stressful as can be imagined. Having enough money that you can’t run out imof it (assume being prudent) would be great, but the social costs are high. I like my friends and neighbors and don’t want to have to get new ones because of the influx of ridiculous amounts of money. [0] - https://www.bloomberg.com/news/articles/2018-09-12/the-poorest-americans-risk-the-most-in-hopes-of-striking-it-rich https://www.bloomberg.com/news/articles/2018-09-12/the-poore... [1] - https://www.cnbc.com/amp/2017/08/25/heres-why-lottery-winners-go-broke.html https://www.cnbc.com/amp/2017/08/25/heres-why-lottery-winner...

WorldMaker 8y ago

The interesting part is that lotteries are investment schemes of a sort and designed for gradual payouts more akin to an annuity. The jackpot numbers always include a disclaimer that that would be the total winnings over the lifetime of the payout of that "investment product": immediate payouts are considerably smaller and not just because they involve more taxes. (Obviously it is in the lotto's favor to often spin it as entirely taxes and fees, rather than admitting that it's an "investment" product that they "sell" to "buyers" where the large dollar figures are based on a time-value-of-money calculation.) The number of contestants that take the lump sum up front instead of treating it like an annuity to supplement their lifestyle over time is staggering, and also indeed another likely indicator of the selection effect that the people most likely to play the lottery are the least likely to have good investment advice in their lives.

goatlover 8y ago
The first thing I would do is seek legal and financial advice before telling anyone or deciding anything. I might also temporarily relocate to an undisclosed location with being on vacation as my excuse.
mobilefriendly 8y ago
It is very prudent to take the lump sum. Future tax rates are likely to be higher and there's potential for a future government debasing the currency and the winner seeing the payouts eroded by high inflation. There's also a remote chance the lottery or payment provider fails or is nationalized in some political act. You also can better plan your estate if you control the asset outright.
- WorldMaker 8y ago
  Yes, there are situations where getting the lump sum is more prudent, but it shouldn't be the default in the average case. It is sometimes possible that you can find a better annuity or investment product to invest the lump sum in yourself and make back the lossage of the asset's interest/share in future lotto profits included in the longer term investment product, but that requires analysis and comparison, with good financial advice to reach that conclusion. But the keyword is "sometimes", everyone has different investment needs, and overall strong, steady passive income is often preferable to lump sums, especially without good financial advice to rely on to manage it. Regular Lotto payments, even fixed ones, are some of the least likely assets to default (historically tend to be quite stable/secure) you can have if your threat model includes future governments debasing currency or high inflation. It's sad how strongly inversely correlated bad economies are to higher lotto activity. (Now, if your threat model includes future governments strongly prohibiting gambling and gambling payouts, that's a different matter.)
  - gizmo686 8y ago
    The lottery is still a single asset (even if it is backed by a diversified portfolio). When we are talking about hundreds of millions of dollars, I would be willing to pay a premium to hold that money in a more diverse way. This is the same reason I prefer 401ks to pensions (and our government has not demonstrated an ability to start with a fixed fund and not raid it for unrelated purposes) For your threat model question, I would be much more concerned about the state raiding the lotto fund to pay for, say, their pension obligationd than I am about them retroactivly banning lotto winnings on moral grounds. It is much harder for the state to steal from investments it doesnt control.
MarkMc 8y ago
Reminds me of the time Warren Buffet's company insured a gambling company against a "billion dollar" payout [0]. Buffett noted that the insured value of the payout was far less than a billion dollars because the payout was spread over 40 years and joked that the gambling company rejected his advice to spread the payout over a billion years - paying $1 per year. [0] https://www.insurancejournal.com/news/national/2000/10/03/11427.htm https://www.insurancejournal.com/news/national/2000/10/03/11...
scott00 8y ago
Taking the lump sum is not at all indicative of a lack of good investment advice. Going with the installment payments is equivalent to taking the lump sum and then investing it all in US treasury bonds. That's an extraordinarily conservative investment strategy and most investment advisors would recommend something more aggressive.
- WorldMaker 8y ago
  It's more that that the ratio is so out-of-tune with the ratio of investors whom should be getting conservative investment strategy advice at the decision point in question. The qualifier here may be "good investment advice". Most investment advisors would recommend something more aggressive, but they also get paid a lot more in that case, that doesn't necessarily correlate with "good advice".
- fjsolwmv 8y ago
  Getting a surprise $100M is different from managing your portfolio. Aggressive means easy to lose it all due to ignorance or fraud. Getting a dozen mulligans via installments is good insurance against losing it all.
  - scott00 8y ago
    > Getting a surprise $100M is different from managing your portfolio. It's really not that different. All of the advice out there concerning how to prudently manage a portfolio of $100K applies pretty well to $100M. Going up to the $100M opens up some additional options (private equity, hedge funds, venture capital, real estate) and involves some additional taxes (estate/gift taxes), but you could do a lot worse with your $100M than sticking 60% in low cost equity index funds and 40% in low cost bond index funds and ignoring alternatives and tax optimization. > Aggressive means easy to lose it all due to ignorance or fraud. More aggressive than ultra-conservative does not mean aggressive in an absolute sense.

MR4D 8y ago

There is a selection effect. It’s actually well documented [0] that poor people buy more lottery tickets than people richer than them. Not just as a percent of income, but also absolute dollars. From a behavioral perspective, I doubt that most Americans are well suited to winning a lottery and being able to manage that transition well. Just look at all the bankruptcy stats on lottery winners. [1] I work with people who have a lot of money. It’s part of my job. And although I’m not rich, im not suffering either. But this week as I reflected with my wife on what winning a billion dollars would be like, the thought that it would rip you out of whatever reality we currently live in and plop is into another reality is inescapable. For instance, I want to enjoy the money. That means I’m never flying coach again. But if I’m flying my family around the world first class, who do we go with? Our friends don’t have that kind of money. So would we pay for them? Ok, then when do we stop paying for others? (Before the money is all gone). And how does it affect the friendship when one friend is paying for everything the other one enjoys? The dynamic is weird, and probably stressful as can be imagined. Having enough money that you can’t run out imof it (assume being prudent) would be great, but the social costs are high. I like my friends and neighbors and don’t want to have to get new ones because of the influx of ridiculous amounts of money. [0] - https://www.bloomberg.com/news/articles/2018-09-12/the-poorest-americans-risk-the-most-in-hopes-of-striking-it-rich https://www.bloomberg.com/news/articles/2018-09-12/the-poore... [1] - https://www.cnbc.com/amp/2017/08/25/heres-why-lottery-winners-go-broke.html https://www.cnbc.com/amp/2017/08/25/heres-why-lottery-winner...