How do we assess the risk of buying a lottery ticket?

Most people buy tickets to win money rather than to help good causes, but their chances of winning are slim, says our investment columnist John Hildebrand

John Hildebrand
John Hildebrand

Great Britain's tally of 29 gold medals at the London Olympics, compared with only one at the 1996 games in Atlanta, highlights what can be done with the money from the National Lottery.

But is it worth it? Why do people buy lottery tickets? Do they do it to help good causes, to win money or because they don't understand the odds?

Now might not be a good time to be cynical, but most people buy tickets to win money and do not realise that the chances of winning the lottery are the same as being killed while cycling for a mile. So how should people assess the odds?

If we concentrate first on risk, one way to evaluate this is to look at micromorts, which put a numerical value on the chance of dying. One micromort is equal to a one-in-a-million chance of death. It allows statisticians to compare risky activities such as skydiving with safer ones such as walking. One jump and a 119-mile walk each score seven micromorts.

The National Lottery was set up in the UK in 1994 with half the money going to the prize fund, 10 per cent to the retailer and lottery operator and the rest going to a combination of government and "good causes". As government takes 12 per cent, most think charities receive 28 per cent of lottery money. This is not strictly accurate, but charities have been big beneficiaries of lottery money.

The chance of winning the 'lotto' based on correctly guessing the numbers on six balls from one to 49 is said to be one in 13,983,816. These are not good odds: if they were, everyone would buy tickets. The Irish lottery (six of 36 balls) puts the odds of winning at one in 1,947,792. When the Irish jackpot reached £1.7m in 1992, a consortium bought 1.6 million combinations and made £310,000 profit. However, this strategy only works if there has been a sizeable roll-over.

Charities benefit the most from the lottery when prizes are unclaimed for more than 180 days, because this money goes to good causes. Surprisingly, this happens quite a bit, with many unaware that Euromillions tickets include a £1m raffle. Given our success at the Olympics and people's reluctance to claim prizes, the chances are people will be happy to fund good causes and sport - even activities with a high level of micromorts.

John Hildebrand is an investment manager at Investec Wealth & Investment

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