Once again, a national lottery has hit the coveted half-billion-dollar mark, and millions of people have lined up for their shot at unimaginable riches. Before the drawing, the news was full of discussions of how unlikely it is to win a lottery and how irrational it is to buy tickets. And now that the winning numbers have been drawn, you can expect to see countless pieces of advice for the winners.
Instead, I want to focus on how you can use the lottery experience to get smarter about money. You won't find a categorical dismissal of lottery-playing in this article, but the way you respond to the possibility of having hundreds of millions of dollars fall into your lap can actually tell you a lot about your financial temperament, giving you valuable information to make you a better investor.
Answer the following questions and see what you can learn.
1. How many tickets did you buy?
By now, just about everyone is familiar with the 1-in-175-million odds of winning the Powerball. Combine that with the likelihood that multiple players will pick the same winning numbers, and it becomes almost impossible to have a positive expected value from playing, from a purely economic standpoint. So if you didn't play at all, you have a very clear head and should be better able to consider investing decisions unemotionally.
For a couple of dollars, buying a single ticket isn't a crazy proposition. Given how much money many people throw away on other forms of entertainment, the value you get could well be worth $2. A willingness to take some risk in order to get an outsized payoff is a useful investing trait.
More troubling is if you were among those spending hundreds or even thousands of dollars on tickets. Making big bets when the odds are against you is a recipe for potential disaster, and it's similar to what investors in certain types of exchange-traded funds have suffered. United States Natural Gas (UNG 2.64%), for example, hit investors not only due to falling natural gas prices but also because the characteristics of the natural-gas markets created built-in costs that added to losses. Similarly, leveraged ETFs Direxion Daily Financial Bear 3x (FAZ 0.34%) and ProShares UltraShort Silver (ZSL +0.31%) hammered investors with huge losses when the markets they tracked went against them, while not providing them with enough gains during good times to offset those losses.
2. Are you planning to play again?
When the jackpot is particularly high, there's a better argument in favor of playing the lottery. But if you make a habit of playing even when jackpots are relatively low, it suggests that you don't think there's any realistic way for you to get rich more slowly.
Lack of patience is a tough thing to crack in investing, but staying patient is easier if you can get in the habit of adding money to your investment portfolio regularly. That way, you'll see your balance grow even in flat markets, and you'll have the satisfaction of buying more shares at cheaper prices when markets act badly.
3. Do you look for a hidden angle?
Theories about winning lotteries abound, with everything from choosing your own numbers rather than letting the computer choose to researching past winners. Trying to beat the lottery may be a lost cause, but a willingness to go beyond simple methods to find potential winners is an excellent trait.
For instance, rather than playing the lottery, you may want to look at Scientific Games (SGMS +4.59%), the company that provides support services for the Powerball. Predictably, its shares have soared recently as the Powerball gets more attention than usual. But earlier this month, Scientific Games fell sharply on weak earnings, with the company's presence in China proving most disappointing. Scientific Games is far from a sure bet, but it's a recipient of part of every dollar that gets wagered on many lotteries.
Be smart -- and lucky
In the end, investing combines intelligence, skill, and a bit of good fortune. If you can put together that winning combination, then you'll probably prefer to put every spare dollar into your portfolio over playing the Powerball -- at least more than once.
