Tuesday, February 22, 2011

Investing or Gambling? Part 2: The Definitions

In this second installment of our analysis, we will examine the definitional differences between gambling and investing. This information will form the basis by which we will judge future comparisons of each discipline.

To begin, there are fundamental similarities and differences between gambling and investing. Both involve a participant's initial outlay of money for purposes of receiving future payments that exceed the investment amount. The definitions below describe the expectations that each monetary outlay will purchase.

Investing Defined
Those who invest receive partial or full ownership of a physical asset, whether it be a company, commodity, real-estate, manufactured good, production rights, etc. which can be redeemed at a future date at the discretion of the owner. The vast majority of investors typically have no direct financial control of the asset. Appreciation of value is acheived based on fundamentals of supply and demand, and operating efficiencies. When an asset grows in value, an investor may realize a profit on his investment; and when an asset drops in value, the investor may incur a loss. But, the actual profit or loss is only realized when the investor sells the asset. The key here is that the investor has the sole opportunity to act.


Gambling Defined
Gambling involves purchasing the right to participate in the possible ownership of a product or prize based on a certain outcome of a particular event. Depending on the prize structure, a gambler only receives income if his predicted guess correctly matches the ordered result of the event, such a lottery drawing, horse race, the win or loss of a sports team, a poker hand, etc. Once the event is completed, the gamblers asset value (if any) is returned to the player. These investors either win or lose, and the participation right is valueless once the event is over. Important here is that gamblers have no influence over the outcome of the event.

  • To play a game for money or property (Merriam-Webster)
  • To bet on an uncertain outcome
  • To bet on an uncrtain outcome, as of a contest (TheFreeDictionary)
  • To play a game of chance for stakes
  • To take a risk in the hope of gaining an advantage or benefit

Three Major Distinctions
From the definitions above, we can identify three major distinctions between investing and gambling.

First, the primary distinction between investing and gambling is ownership of an asset. An investor purchases an asset of value whereas a gambler purchase an outcome. The investor's asset maintains value for the life of the asset. Whereas, a gambler's outcome has no value in itself. The only means of profit is derived from the investments of the other gamblers involved.

Secondly, an investor's asset derives value from market demand, which can cause the value of the asset to fluctuate. However, a gambler's asset has value limited by the expectations of others. Any changes are based on parimutuel betting odds or a gambler's expectation of winning. Please realize that neither of these are physical factors.

Third, an investor has an option to sell his asset. But, a gambler's asset rarely has any secondary retail value. It's not very often that: a race track bettor or lottery player will sell his ticket; or, a poker player will sell his hand. But stock market and bond investors continually buy and sell these assets.

Hidden Ambiguity
Occasionally, the lines of distinction between investing an gambling can appear to be blurred. For example, consider an options investor. In this case, the investor purchases the right to buy (or sell) an asset for a predetermined period of time. At the expiration of the term, the asset may or may not have any value. This sounds like gambling.

However, two things differentiate options investing from gambling. First, there is an underlying physical product to the option. Second, the investor has the opportunity to sell, exercise, or expire the option. These are all directly under the investors control.

Summary of the Subtle Similarities
Both successful gamblers and investors understand that favorable outcomes involve probabilities. The skilled player of both professions understands the risks and chances for success. They invest (bet) accordingly.

Both are investing in the unknown. Neither the investor or gambler knows what will happen in the future,  but both are willing to invest their earning with the hope of receiving a future profitable payout.

In our forthcoming articles, we will utilize these definitions to clarify and identify the differences and times to show when investing becomes gambling, and when gambling becomes investing.

Tuesday, February 15, 2011

Investing or Gambling? Part 1: Introduction

The New York Stock ExchangeImage by BlatantNews.com via Flickr
When we first created our website and blogs, we strongly believed that playing the lottery was not gambling. Our thought was that since the chances of winning a jackpot prize was so small, one could not realistically gamble on their winning. To us, gambling involved having a reasonable expectation of winning. In games such as Powerball and Mega Millions, it is nearly impossible to have this expectation. Thus, we concluded, these games were not gambling.

However, as we began to study smaller games, such as the Pick 3, we realized that given the right circumstances, a player could achieve a reasonable expectation of winning. In these cases, we do not believe one can expect to receive a mutli-million dollar windfall, but perhaps a continuous 10% or 20% return was possible.

Considering these realistic return percentages, we began to compare realistic returns that investors achieve in the stock or other markets. In good times, a stellar fund may reward investors with similarly high rates of returns. So we wondered:

Can Gambling be Considered Investing?
Is Investing Gambling?

To help understand these answers, we have decided to write an investigative comparison of both gambling and investing.

In the issues that follow, we will present:
  1. The definitions of investing and gambling
  2. Outline why this topic is important at this time
  3. Identify the differences between the two of these
  4. Present examples of successful investors and gamblers
  5. Examine various gambling games and investment options
  6. Look at the profile of a typical investor and gambler
  7. Compare the mathematics involved in both disciplines
  8. Consider whether the outcomes can be manipulated
  9. Conclude by quantifying whether investing is also gambling.
During the next 9 weeks or more, we will address each of these topics in detail.  We will try to illustrate the differences between the two concepts and reinforce why all folks should be conservative with their investments. At the end of this series, we will, hopefully, reach a solid conclusion about whether investing may also be gambling; and perhaps more importantly, why you should even care.
Enhanced by Zemanta

Tuesday, February 1, 2011

A Revised Look at the Mega Millions Megaplier Option

When the Mega Millions and Powerball lotteries began cross selling in the previous proprietary States in early 2010, the Megaplier Option was immediately available in the original Powerball states. This has been a popular option to increase prize payouts especially when the Jackpot prizes were low. To help stimulate even more interest, Powerball established a fixed $1 million second place prize for those players who bought the Powerplay. This change helped to increase sales of this option.

To keep pace, Mega Million states pushed to implement the Megaplier. More importantly, the Megaplier second place prize was also increased to a guaranteed $1 million as well. At the time of this writing, nearly every state that sells Mega Millions tickets now offers the Megaplier Option with a fixed $1M prize for those fortunate to match all 5 of the white balls, but not the Megaball.

Thanks to a comment written by an Anonymous author, we were alerted to the recent prize structure change. This post provides the an up-to-date revision of our original Megaplier research post written in December 20007 entitled Should You Buy the Power Play, Sizzler, or Megaplier?

As Mega Million lottery interest has grown since the January 2011 record Jackpot of $355 milllion, many players continue to ask:

Should I Buy the Megaplier Option?

As originally advised,
The correct answer remains both Yes and No!
It depends on the size of the Jackpot,

And Your Strategy.

How would you know when to buy it?
If your lottery playing strategy is to win the Jackpot, we advise that you always buy the Megaplier option whenever the current jackpot value is below its Jackpot Breakeven level.
  • For Mega Millions, Breakeven is now $53.1 million: Buy the Megaplier Option whenever the Jackpot is below this value. Never above this. Buy 2 tickets instead.
However, if you strategy is to maximize your prize winnings by religiously playing a consistent set of  numbers, we recommend that you always buy the Megaplier.

Effect of Change?
Because the 2nd place prize is now always fixed, the amount of money returned to Megaplier players has also increased. The net effect of this increase means that the Mega Millions breakeven has increased by $5.9 million from $47.2M to $53.1M.

Note, however, that as the Jackpot increases above its minimum, only the probability weighted amount of jackpot money returned to players increases. This means that all other prize payouts are fixed. Thus, there is always a fixed point (jackpot level) at which the return of single ticket payouts equals the return of the Megaplier ticket payouts.

As lottery players, we want to play the option that returns the most money back to us, the players. As you will see below, your option changes depending on the jackpot level.

Mega Millions Megaplier
When a player buys the Megaplier option, all  prizes that the player wins, except the Jackpot, will be multiplied by either 2, 3, or 4, depending on what Megaplier was selected. Additionally, the new rules fix the 2nd place prize Megaplier multiplier at 4, regardless of what was picked. This means that the top non-jackpot prize for matching 5 white balls is always $1,000,000. Accounting for this new change, the probability weighted average of all other non-jackpot prizes remains at a multiplier equal to 3.476 times.

Based on this information, the graph below illustrates both the expected Megaplier return (in blue) against the expected return of a single Mega Millions ticket without the Megaplier (in red).

When the jackpot is set to the minimum $12 million, Megaplier returns $0.367 (increased from $0.350) of each dollar received, compared to $0.250 for those without the option.

When the jackpot level reaches $53.1 million, both tickets with and without the Megaplier returns $0.484 of each dollar received. We refer to this $53.1 million as the Jackpot Breakeven level. (Note that previously, the breakeven return was $0.451 at a $47.2M level).

Above this breakeven level, tickets purchased without Megaplier return more to the players. When the jackpot grows to $90 million, $0.694 is returned to straight ticket holders compared to only $0.589 (previously $0.572) to those who bought the Megaplier.

Megaplier chart

Because the new Megaplier rule is now in effect in most Mega Millions states, the overall monetary return of money received has increased.

We suggest that all lottery playersshould purchase Lottery Tickets like they would any other investment, and always seek the highest return on their dollars. Thus, when the Mega Millions jackpot is below $53.1 million, the Megaplier should be purchased. When the jackpot is above this level, never purchase the Megaplier. Go for the Jackpot instead.

Learn More
To learn more about this subject, visit our in-depth pages that provide the detailed numbers behind each of these options.

Related Posts Plugin for WordPress, Blogger...