The Powerball at the End of the Long Gamma Rainbow

Tomorrow night we may see the largest Powerball jackpot in history, and the 2nd largest US lottery payout ever. But we can say one thing for certain: we won’t win it, because we aren’t playing. But why not? It is a bet with an asymmetric payoff – the chance at an outlier gain, the kind of long gamma-type strategy managed futures are known for… You would think we would be all over it.

So why don’t we like the lottery?

As with most things, it’s the math that gets in the way – those very small winning percentages. You see, while hitting the outlier trade in managed futures is far from a certainty, it’s definitely more likely than your chance of winning the big payout in Powerball. So, while an outlier trade in managed futures would only be a factor of 10 or maybe 20 above the invested amount, the odds of it happening are well within the realm of possibility. But with the Powerball, where the outlier is several hundred million times the investment, the odds are almost as bad at just 1 in 175 million (essentially 0%).

All that said, there is one thing that makes this drawing special. As Walter Hickey points out over at Business Insider, the jackpot has grown so large as to make the expected value of a ticket higher than its purchase price. In other words, if you could purchase every single Powerball ticket combination, you could make more than the cost of your total purchase (assuming you didn’t split the prize with anyone else… or take the lump sum payment… or pay taxes).

But short of such an undertaking, it still probably isn’t worth your money. To give a better sense of your odds, there’s a nifty little tool which can simulate the results of buying Powerball tickets thousands of times.

We ran a simulation playing 10,000 times (or the equivalent of two $2 tickets per week for 96.2 years), which gives an expected return of -$18,488, having purchased $20,000 in tickets, and “won” a whopping $1,512 over the years (by hitting the Powerball alone, or getting just a few numbers correct). As one commenter said, you have a better chance of being eaten alive by a shark and a tiger on the same day than winning the lottery (although that may be somewhat of an exaggeration).

And what would happen if you saved that $16 per month instead? Even at the current ultra low rate of 1%, saving the $16 per month for 96.2 years and compounding it monthly at a paltry 1% annual rate (and it would be something if rates stayed there for the next 96 years…) would result in a final balance of just over $31,000. You’d have made more than $12,500 in addition to keeping your money – definitely preferable to losing more than -$18,000.

You never know, you could get really lucky. But you’re almost certainly losing yourself real money by playing the lottery week after week, year after year.

One comment

  1. Hello again! Thanks for the link to the simulator. The problem with this analysis is that it is not universally true in the sense that it is rejected by the winners, even posteriori. For them it made sense to play the lottery, posteriori. If we can find a black swan then the rule that all swans are white does not hold. Similarly, since there are already winners, the rule that it makes no sense to play the lottery does not hold. The rule could hold only if there were no winners yet. How will you convince a guy who is driving a Bentley that his 1$ bet was no good? It just fails verification. What do you think?

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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