Now that no one has won the $363 million jackpot, the Mega Millions payoff is expected to escalate to $500 million on Friday. We will probably buy a few tickets this time ($363 million wasn't enough, but $500 mil? Now you're talking!)
The left-brain folks are fond of reciting odds that prove that lotteries are a fool's game, statistics such as it's more likely that one will die in a lightning strike or driving to buy the ticket than one will win the lottery. What the ratiocinators don't take into account is that the lotto vendors are also selling hope. People will pay a lot for even a smidgeon; just ask any cancer patient.
But back to the Mega Millions jackpot. Around the dinner table the dreamers talked about what they would do if they won. We gently diverted them to the issues a winner should consider. The first decision was: lump sum or annuity? We talked about the concept of present value, how $500 million payable over 26 years might translate to a single payment of $300 million today, depending on the interest rate.
We talked about how current and future tax rates, both Federal and State, might enter into the calculation. We talked about the difference between equity investments, bank accounts and CD's, and Treasury obligations. We discussed estate taxes and the various tax and legal reasons that rich people set up trusts.
We all agreed that it's much better to have a lot of money, but rich people don't have a worry-free life. They can hire expensive advisors to manage their finances, but how can they be sure they are trustworthy? Every month there's a story that about how a bookkeeper, lawyer, investment advisor, and/or trusted friend or family member stole $millions. And even if the advisors are honest and competent, they can still go very wrong. Just ask any holder of triple-A collateralized debt obligations.
Then the dreamers thought about the new houses, cars, and other neat stuff they could buy, and how they wouldn't have to work at jobs that they didn't like. The human mind can dwell on the negative only so long. © 2012 Stephen Yuen
[Update: this analysis concludes that the expected value of a $1 ticket purchase peaks at 69 cents when the jackpot is $420 million. At higher amounts the probability of sharing the pot increases faster than the growth in the pot itself.]