The lottery is any form of gambling which involves drawing lots for a prize.
Depending on the game, the value of the prize and the odds of winning vary greatly. Typically, the lottery is a state or nationally sponsored and regulated activity.
From time to time the big multi-state lotteries, like Mega Millions and Powerball, will reach such astronomical sums that people can’t help but buy a ticket. Indeed, daydreaming about winning the lottery and becoming instantly wealthy is half the fun. For a lucky few, winning the lottery is a reality.
These days, playing the lottery usually means choosing a series of numbers or scratching off a small card to reveal whether you are a winner. However, lotteries have been a part of society for thousands of years. In fact, the first recorded signs of a lottery go back to the Han dynasty in China around 200 BC.Some historians believe that this lottery was used in part to finance the construction of the Great Wall of China.
Today’s lotteries are also state-sponsored programs that boast raising billions of dollars for education. For example, from 2012-2013, the Florida Lottery raised $1.41 Billion dollars for the Educational Enhancement Trust Fund, bringing the total contributions to over $27 Billion dollars.
The first decision that a lottery jackpot winner has to make is whether to take a one-time lump sum payment or to receive an annuity, guaranteed payments over a set number of years. For example, some recent winners of Powerball had to choose between the following:
|Date||Annuity Amount||Lump Sum Cash Amount|
Some quick math reveals that the lump sum amount is equal to approximately 60% of the annuity amount. This difference is the result of the time value of money. Surprisingly, very few Powerball winners seem to entertain the annuity options, even though it provides a higher payout. Between February 1, 2003 and November 29, 2014, only 4 out of 167 Powerball winners chose the annuity option. This is less than 3%!
There are a few important points that make these decisions particularly surprising.
Primarily, if the jackpot winner decides to take the Annuity option, they can always sell the annuity and receive a lump sum payment comparable to the one offered by Powerball. Secondly, very few people are prepared to deal with all the issues that arise from having such a large lump sum of cash available to them. This can have dramatic consequences resulting in lottery winner horror stories, such as those featured on TLC’s popular television series “Lottery Changed My Life.” These horror stories beg the question of whether winning the lottery is truly the ticket to easy street.