Powerball: The Difference Between Gambling and Investing

Wow! After weeks without a winner, there were three winners in last night’s Powerball lottery. Congrats to the winners!

Powerball is a bad bet and an even worse investment. We can all run the math. The WSJ did a nice visual comparing the odds of winning Powerball to other odds. A one in 292 million chance of winning is inconsequential. [As an aside, a 1 in 112 chance of dying in a motor vehicle accident is scary and something we’ve got to improve.]

What was unusual about this Powerball drawing is that the NPV of an investment in a ticket was not far from break-even. There are a lot of practical and technical reasons that made it less than break-even, including the prospect of multiple winners, taxes and the reality that you would have had to buy $560 million in tickets. But even factoring in those considerations, it wasn’t that far off. That doesn’t mean that buying a ticket was a good investment.

Is Powerball a good Investment?

Conscious that the odds were horrible, I bought 10 Powerball tickets anyway; a $20.00 bet on a huge pot. I had some fun and educational conversation about the topic with my kids last night. I encouraged them to not only think about the NPV of the investment but also to look at the distribution of returns.

We considered the question:

Even if buying a Powerball ticket had a positive NPV, would it be a good investment?

In Powerball, for every ticket you buy, you have a 1 in 292 million chance of winning…. and a 291,999,999 in 292 million chance of losing. That is a 99.9999997% chance of losing! Powerball is the ultimate winner takes all scenario. With such high odds of losing, does it even matter if the NPV is positive?

Distribution of Returns Matters

Forget about whether or not the NPV is positive. With the return distribution so skewed -producing a staggering return for the winner and a loss for everyone else – Powerball may be a fun bet but it is a really, really bad investment.

The distribution of returns is worth considering independent of the NPV of an investment. All else equal, I’d take a normal distribution curve over a distribution curve that is skewed with returns concentrated several deviations to the right of right of the mean. A normal distribution curve is indicative of investing. A skewed distribution curve is indicative of gambling.

Spending (note, not investing) 20 bucks on Powerball tickets was still fun and gave us an opportunity talk a little investment strategy at home. That alone was worth the $20, the entirety of which we lost. At least we can take the loss as a tax deduction!

A Footnote: If you care to compare the Powerball (an extreme example) to venture investing, here is a nice piece on the distributions of returns in venture capital. I’m not making the case that venture investing is gambling. However I do believe that investors need to be hyper-conscious of the distribution of returns. Entrepreneurs should be even more aware of this phenomenon.

Powerball: The Difference Between Gambling and Investing