Friday, March 15, 2013

New Lotto Texas 2013 - Review of the Game Changes

Revised: Friday, April 26, 2013

For the 4th time since the game began in 1992, the Texas Lottery Commission (TLC) will be making changes to Lotto Texas.

These changes will become effective beginning with the April 17 2013 drawing.

This is our summary of the changes and our evaluation of them.

The basic Lotto Texas format will remain the same. 
Players will still be required to pick 6 numbers from a set of 54. If the full 6 number combination matches the one drawn that evening, the player will win the jackpot prize. Each single ticket will continue to cost $1 each, and the lower tier prizes will remain the same (i.e. those matching 3, 4, and 5 of the white balls). Should a player be lucky enough to win the jackpot, he will still have the option to receive either the lump sum cash payout, or the full advertised annuity amount paid over a number of years.

What Changes
However, there will be 4 differences in the new Lotto Texas 2013 game.
  • First, a "Extra!" option is added to the game. Players can choose to pay $1 more for the chance to win higher cash amounts for the lower tier prizes. This means that those holding the Extra! option will earn higher prizes if they match 3, 4, or 5 balls. Plus, a new $2 prize payout will be added for those matching only 2 of the 6 balls. (This is in effect a "multiplier" option).
  • Second, the minimum annuity jackpot prize will be increased to $5.0 million.
  • Third, the annuity payout period will increase from 25 to 30 payments.
  • Forth, the annuity jackpot will increase in increments of $250,000 rather than the current $1 million.
While we rarely like the idea of raising lottery ticket prices, we have found that those games with a "multiplier" option usually offer better returns to the lottery players. Since players have the option (or choice) to pay more for a ticket, they have more control over the amount of money they spend. Thus, we believe this is fairer to them because they can control their own spending.

To help players understand how these changes will affect them, we discuss each of these 4 changes below.

Summary of Lotto Texas 2013 Changes and Payout Structure
To begin, we have prepared the summary Table 1 below illustrating the prize payouts for a single $1 ticket and the new $2 Extra! ticket.

Table 1: New Lotto Texas 2013
Payout Structure
 Match  Chances Occurs Probability Single $1  
6 25,827,165.00  1 0.000004%  Jackpot   Jackpot 
589,677.66 288 0.001115% $2,000  $12,000 
41,526.43 16,920 0.065512% $50 $150
374.66 345,920 1.339365% $3 $13
28.85 2,918,700 11.300892% - $2
12.51 10,273,824 39.779140% - -
02.10 12,271,512 47.513972% - -

Total  25,827,165   100.000000%  - -

Here we can see that there is no change to the single $1 ticket set of prizes. However, the Extra! ticket offers increased prizes for those matching 3, 4, and 5 balls. The match 5 prize moves from $2,000 to $10,000; the Match 4 prize moves from $50 to $100; and the Match 3 prize moves from $3 to $10.

And, we can also see the new $2 prize for those matching 2 of the balls. The addition of this new prize is what makes the Extra! ticket attractive. Assuming all possible combinations were purchased, there will be nearly 3 million new winning tickets, an increase of 11.3% over those who did not buy Extra!. Further, those matching: 5 balls have a 5 times multiplier; 4 balls have a 2 times multiplier; and 5 balls have a 3.33 times multiplier.

On a $ return basis, we look to see what will be returned to the players if the jackpot prize is not won. In the case of the single $1 ticket, we find that 9.52% is returned. Whereas, the Extra! ticket returns 31.61% of the money back to the players. This is an increase of 3.32 times, and it exceeds the 2 times cost in Extra! ticket. Thus, we believe that the Extra! option is attractive and should be played.

The Breakeven: When to buy Extra! - Like all other multiplier games, the new Lotto Texas Extra! option has an implied breakeven value. This is the jackpot amount where the returns of a single ticket equals that of the Extra! ticket. For Lotto Texas, we calculate this value to be: $11.4 million. Thus:

Buy Extra! when the jackpot is less than or equal $11.4 million;
Do not buy Extra! when the jackpot is more than $11.4 million.

Minimum Jackpot Increases to $5 Million
There are two components to increasing the minimum jackpot. First, people tend to buy more lottery tickets when the jackpot increases. This means that increasing the minimum jackpot from $4 to $5 million will result in higher ticket sales.  Second, the addition of the new Extra! option will most likely increase the Texas Lottery Commission profits since many players will be willing to pay $2 for their ticket rather than $1 because of the improved prize payouts.

Thus, it is noteworthy that the Texas Lottey Commission recognized the potential for increased profits and raised the minimum Jackpot accordingly.

Annuity Payout Period increases to 30 payments.
However, changing the annuity payout period from 25 to 30 payments only benefits the Texas Lottery Commission, not the players.

On the surface, players may be indifferent to this change because most jackpot winners opt for the cash value payment. But, the value of the cash prize offering is directly proportional to the length of time established by the annuity. This means that for any given annuity value, the longer the annuity term to maturity (years of payments), the lower the cash value will become.

Thus, even though we have a higher annuity value, the corresponding cash value payout will be proportionately lower than what currently exists.

In theory, the Texas Lottery Commission (TLC) should not care whether a player chooses to take the cash option or the annuity payment. The reason is that the cash value should be valued at the amount the TLC must invest in order to achieve the annuity payments.

But since the discounted cash value will be lower after the 2013 changes are implemented, the TLC will profit more from the difference it is saving.

Further, some players who would have previously opted for a 25 payment annuity may shy away from a 30 period annuity: First because it is 5 years longer (which increases the uncertainty period); and Second because the yearly annuity payment will be lower.

Lets assume the annuity value is set at $5 million and the investment yield is 2.80%. Under the current rules of 25 payments, the cash value will be $3.66 million and each of the annuity payments will be $200,000.

However, under the new 2013 rules of 30 payments, the cash value will be lowered to $3.45 million and each annuity payment will be reduced to $167,000.

Under this scenario, the TLC will profit by $210,000 simply by the difference in the cash values. And, the players yearly payment will decrease by $33,000.

Table 2: Annuity to Cash and
Yearly Payouts Scenarios
 Jackpot   Yield   Old
Old Yearly
New Yearly
$4M 2.8% $2.93 $2.76 -$0.17 Old Yrly - na -
$5M 2.8% $3.66 $3.45 -$0.21 $0.200 $0.167
$5M 4.0% $3.25 $3.00 -$0.25 $0.200 $0.167
$5M 6.0% $2.71 $2.43 -$0.28 $0.200 $0.167
$10M 2.8% $7.32 $6.89 -$0.43 $0.400 $0.333
$10M 4.0% $6.50 $5.99 -$0.51 $0.400 $0.333
$10M 6.0% $5.42 $4.86 -$0.58 $0.400 $0.333

Table 2 above illustrates various annuity to cash values for 3 different yield values: 2.8% (current value); 4.0%; and 6.0%. As we can see, the new jackpot cash value for 30 payments is always less than the current 25 payout structure. Additionally, we can see that the annuity payout in the new 2013 game will be less than what winners receive now.

Jackpot Increases by $0.250 million
The last major change with the new 2013 Lotto Texas will be the increments by which the annuity jackpot will grow.

Under the new rules, the jackpot will grow in increments of $0.250 compared to the existing $1.0 million increment. This does not mean that the jackpot will only grow by 1/4 million dollars between consecutive non-winning drawings. Instead, it means that the annuity will be set to the closest 1/4 million.

While this may appear to be a detriment, we believe it is a good improvement to the game because it will be fairer to both the Lotto Texas players and the TLC as well.

The reason is that the annuity can be adjusted more proportionately to actual ticket sales.

For example, when the jackpot is set to the minimum, ticket sales are low. But, as the jackpot increases, the ticket sales increase as well.  Thus, when the jackpot is set at $5.0 million, the next drawing jackpot may only be $5.25 or $5.50 million. But, when the jackpot grows to $10 million, the subsequent jackpot might be set at $10.750 or $11.250 million.

In the past, the TLC would have to adjust jackpot growth more randomly because increments would be rounded to the nearest $1.0 million. This would have the effect of the TLC offering a lower annuity jackpot than what its profits would permit.

Setting the Lotto Texas jackpot increment to $0.250 will now be the same as that of Texas Two Step. A review of that game's jackpot history shows that growth appears to be exponential, rather than linear. We believe this same pattern will be repeated by the Lotto Texas game as well.

In summary, four new rules to Lotto Texas will go into effect beginning with the April 17, 2013 drawing.

These changes include: offering a new Extra! option that will increase the non-jackpot prize payouts; increase the minimum annuity jackpot to $5 million; lengthening the annuity payout period from 25 to 30 payments; and, lowering the minimum annuity jackpot growth to $0.250 million.

Overall, we believe these changes will be beneficial to lottery players in Texas, and to the Texas Lottery Commission as well. The Extra! option increases payout returns to the players and will increase the potential number of winners by 3 million. Increasing the minimum jackpot amount will help to attract more players when the annuity is at its minimum. And, changing the jackpot growth will help to increase the annuity offerings because it eliminates precautionary rounding.  The only detriment to the new rules is the lengthening of the jackpot payout period. This may influence more players to choose the cash value payment. But, we believe the annuity is still better because the cash value will be lower than what it is today.

Please not that at the time of this writing, the official rules have not been published on the Texas Lottery website. When they become available, we will add the link to this post and make any modifications necessary.


Tuesday, March 12, 2013

Related Posts Plugin for WordPress, Blogger...