Investing or Gambling? Part 4: The differences between the two.

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There are two primary differences between investing and gambling:

1. Ownership of an asset, and
2. Entertainment.

First, in investing, an investor purchases an asset with the expectation that it will appreciate in value and be worth more in the future than it is at the present time. When gambling, a participant also invests a certain amount of money with the anticipation of winning. However, most gamblers understand that the chances of losing their investment far outweighs their chances of winning.

Second, gambling is entertainment, it is fun. Many people love to go to casinos to play the slots, poker, roulette, or craps. Whether they return home with the same (more, or less) amount of money, the person is usually happy knowing that they purchased a few hours of entertainment. To the lottery player, they have purchased a day or two of dreams. However, investing is work and that is not typically fun. Except for those who purchase antiques or collectibles, an investor obtains very little entertainment value.

Similarities
Aside from the outlay of money, there are few similarities to investing an gambling. In these, both:

• Risk capital to earn a profit.
• Are trying to predict the future outcomes of a certain event.
• Require skill to be successful.
• Are subject to external manipulation.
• Hope to get rich.
• Can lose money.
• Value may be arbitrarily contrived.

Examples of Investing and Gambling
Investing	Gambling
Stocks	Lottery
Bonds	Poker
Coins	Backgammon
Real Estate	Horse Racing
Options	Craps
Cars & Horses	Slot Machines
Collectables	Football Games

Differences
 When considering the two, there are many more differences between investing and gambling that can be identified:

• An investor's time horizon is endless, whereas a gamblers horizon is fixed.
• An investor expects to earn a profit, but a gambler expects to lose.
• The financial return on most investments is quantified, but a gambler's is infinite.
• Investing returns are incremental, but gambling is all or nothing
• An investor's asset fluctuates based on supply and demand. A gambler's asset changes only on anticipated success.
• Investors do not typically influence the value of their asset. Gamblers have direct control over the value of their asset.
• Investors rarely lose their entire investment. Gamblers usually lose most of the money wagered.
• Investments are subject to economic pressures. Gambling games have no economic pressure.

Negative, Zero, and Positive Sum Games.

Most educators consider most forms of gambling to be Negative Sum Games. This means that less money is returned back to the players than the money raised. However, economists liken investing to a Zero Sum Game, meaning that all the money invested is returned back to the investors. Depending on your viewpoint, this may or may not be true. For example, assume that you bought an asset that was destroyed in a fire, lost or stolen. Unless you had insurance (and paid more for this risk), you would lose your entire investment. Depending on the type of asset, others may then become more valuable, or not change in value at all. Investing in bonds can be a Positive Sum Game to the purchaser. Depending on the security, there would be very little risk of losing money, and the payouts would certainly exceed the amount invested.

Summary

In summary, most investors and gamblers participate with the ultimate intention to earn more income. Investors utilize their financial capital to purchase assets that they hope will appreciate. Gamblers, on the other hand, play games with the hope of winning money. Both want to become rich and are faced with skillful competition that can out buy or out play them. Thus, our conclusion is that both these are risky and the unprepared are subject to losing all or part of their money.

Investing or Gambling? Part 3: Why Its Important.

Americans are enamored by wealth. We all dream about being independently wealthy, working as little as possible, and obtaining the most amount of money as possible. But, the harsh reality is that very few of us achieve our goals of becoming millionaires.

For the past few years, the United States has been in a recession. Many individuals have lost their jobs and have remained unemployed for two years or more. At the same time, students graduating from college have found it increasingly more difficult to find employment opportunities. Many students have taken the opportunity to earn a Graduate degree with the hope that they will be more marketable when they finish their advanced education.

People are desperate.

With financial pressures mounting, many unemployed individuals have sought alternate avenues for generating family revenue. Some have become day traders, and others have become professional gamblers.

Temptation is everywhere.

The radio and television advertisements are full of get rich quick schemes, telling us to buy gold, refinance our houses, play the stock market, play the lottery, go to a casino, and more. We are bombarded with stories of successful investors such as Warren Buffet, George Soros, Donald Trump, and Wall Street tycoons who made fortunes playing the markets. At the same time, we see the glamorous lifes of the ESPN World Series of Poker stars, and hear about the fabulous casino and lottery winners.

Taking a gamble.

In the past, the division between gambling and investing was clearly defined. Our images of gamblers were those betting at race tracks, the down on their luck poker player, or the gambling addict. Investors wore suits and ties. They attended meetings and lunches, and put together multi-million dollar deals that rewarded them handsomely.

The internet breaks the barriers.

But with the recent advances in technology, the trading tools previously available only to those in the investment business are now available to all of us. We can now learn to use technical trading tools right in our home for buying and selling stocks. As we learn more, we can buy more exotic products, like options. A few years ago, everyone could play online poker. Although this is now banned, players can continue to refine their skills by playing for fun on a variety of sites.

This past January, 60 Minutes aired a Sports Bedding feature on Billy Walters, a sports betting legend who has never had a losing year.



Because temptation is everywhere, many individuals are attempting to earn a living as either a professional investor or a gambler. I have several friends who stopped working years ago and now earn their income solely from trading stocks. Lately, I've seen a few young college graduates decide to become professional poker players in Atlantic City and Las Vegas, rather than working in the corporate world.

Everyone wants your money.

What I've learned from analyzing lottery games and talking to these individuals is that achieving success is difficult.  Everyone out there wants your money. The more desperate you are, the easier it is to lose everything. Regardless of whether you participate in investing or gambling, you are competing against professionals that have much more money and much more knowledge. They all know the odds of winning and losing, and make their bets accordingly.

Don't be a fool.

Therefore, we felt that it is important to write this series of articles about investing and gambling. In last weeks article, we defined these two concepts and showed how they are different. In subsequent weeks, we will illustrate why the distinction between the two is blurred. In the end, we hope to educate you to the risks of each profession, and to help you keep your hard earned money.

Investing or Gambling? Part 2: The Definitions

In this second installment of our analysis, we will examine the definitional differences between gambling and investing. This information will form the basis by which we will judge future comparisons of each discipline.

To begin, there are fundamental similarities and differences between gambling and investing. Both involve a participant's initial outlay of money for purposes of receiving future payments that exceed the investment amount. The definitions below describe the expectations that each monetary outlay will purchase.

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Investing Defined

Those who invest receive partial or full ownership of a physical asset, whether it be a company, commodity, real-estate, manufactured good, production rights, etc. which can be redeemed at a future date at the discretion of the owner. The vast majority of investors typically have no direct financial control of the asset. Appreciation of value is acheived based on fundamentals of supply and demand, and operating efficiencies. When an asset grows in value, an investor may realize a profit on his investment; and when an asset drops in value, the investor may incur a loss. But, the actual profit or loss is only realized when the investor sells the asset. The key here is that the investor has the sole opportunity to act.

Definitions

• To commit (money) in order to earn a financial return (TheFreeDictionary & Merriam-Webster)
• Laying out money capital in an enterprise with the expectation of profit (Princeton WorldNetWeb)

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Gambling Defined

Gambling involves purchasing the right to participate in the possible ownership of a product or prize based on a certain outcome of a particular event. Depending on the prize structure, a gambler only receives income if his predicted guess correctly matches the ordered result of the event, such a lottery drawing, horse race, the win or loss of a sports team, a poker hand, etc. Once the event is completed, the gamblers asset value (if any) is returned to the player. These investors either win or lose, and the participation right is valueless once the event is over. Important here is that gamblers have no influence over the outcome of the event.

Definitions

• To play a game for money or property (Merriam-Webster)
• To bet on an uncertain outcome
• To bet on an uncrtain outcome, as of a contest (TheFreeDictionary)
• To play a game of chance for stakes
• To take a risk in the hope of gaining an advantage or benefit

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Three Major Distinctions

From the definitions above, we can identify three major distinctions between investing and gambling.

First, the primary distinction between investing and gambling is ownership of an asset. An investor purchases an asset of value whereas a gambler purchase an outcome. The investor's asset maintains value for the life of the asset. Whereas, a gambler's outcome has no value in itself. The only means of profit is derived from the investments of the other gamblers involved.

Secondly, an investor's asset derives value from market demand, which can cause the value of the asset to fluctuate. However, a gambler's asset has value limited by the expectations of others. Any changes are based on parimutuel betting odds or a gambler's expectation of winning. Please realize that neither of these are physical factors.

Third, an investor has an option to sell his asset. But, a gambler's asset rarely has any secondary retail value. It's not very often that: a race track bettor or lottery player will sell his ticket; or, a poker player will sell his hand. But stock market and bond investors continually buy and sell these assets.

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Hidden Ambiguity

Occasionally, the lines of distinction between investing an gambling can appear to be blurred. For example, consider an options investor. In this case, the investor purchases the right to buy (or sell) an asset for a predetermined period of time. At the expiration of the term, the asset may or may not have any value. This sounds like gambling.

However, two things differentiate options investing from gambling. First, there is an underlying physical product to the option. Second, the investor has the opportunity to sell, exercise, or expire the option. These are all directly under the investors control.

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Summary of the Subtle Similarities

Both successful gamblers and investors understand that favorable outcomes involve probabilities. The skilled player of both professions understands the risks and chances for success. They invest (bet) accordingly.

Both are investing in the unknown. Neither the investor or gambler knows what will happen in the future,  but both are willing to invest their earning with the hope of receiving a future profitable payout.


In our forthcoming articles, we will utilize these definitions to clarify and identify the differences and times to show when investing becomes gambling, and when gambling becomes investing.

Investing or Gambling? Part 1: Introduction

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When we first created our website and blogs, we strongly believed that playing the lottery was not gambling. Our thought was that since the chances of winning a jackpot prize was so small, one could not realistically gamble on their winning. To us, gambling involved having a reasonable expectation of winning. In games such as Powerball and Mega Millions, it is nearly impossible to have this expectation. Thus, we concluded, these games were not gambling.

However, as we began to study smaller games, such as the Pick 3, we realized that given the right circumstances, a player could achieve a reasonable expectation of winning. In these cases, we do not believe one can expect to receive a mutli-million dollar windfall, but perhaps a continuous 10% or 20% return was possible.

Considering these realistic return percentages, we began to compare realistic returns that investors achieve in the stock or other markets. In good times, a stellar fund may reward investors with similarly high rates of returns. So we wondered:

Can Gambling be Considered Investing?

or

Is Investing Gambling?

To help understand these answers, we have decided to write an investigative comparison of both gambling and investing.

In the issues that follow, we will present:

1. The definitions of investing and gambling
2. Outline why this topic is important at this time
3. Identify the differences between the two of these
4. Present examples of successful investors and gamblers
5. Examine various gambling games and investment options
6. Look at the profile of a typical investor and gambler
7. Compare the mathematics involved in both disciplines
8. Consider whether the outcomes can be manipulated
9. Conclude by quantifying whether investing is also gambling.

During the next 9 weeks or more, we will address each of these topics in detail.  We will try to illustrate the differences between the two concepts and reinforce why all folks should be conservative with their investments. At the end of this series, we will, hopefully, reach a solid conclusion about whether investing may also be gambling; and perhaps more importantly, why you should even care.

A Revised Look at the Mega Millions Megaplier Option

Introduction
When the Mega Millions and Powerball lotteries began cross selling in the previous proprietary States in early 2010, the Megaplier Option was immediately available in the original Powerball states. This has been a popular option to increase prize payouts especially when the Jackpot prizes were low. To help stimulate even more interest, Powerball established a fixed $1 million second place prize for those players who bought the Powerplay. This change helped to increase sales of this option.

To keep pace, Mega Million states pushed to implement the Megaplier. More importantly, the Megaplier second place prize was also increased to a guaranteed $1 million as well. At the time of this writing, nearly every state that sells Mega Millions tickets now offers the Megaplier Option with a fixed $1M prize for those fortunate to match all 5 of the white balls, but not the Megaball.

Thanks to a comment written by an Anonymous author, we were alerted to the recent prize structure change. This post provides the an up-to-date revision of our original Megaplier research post written in December 20007 entitled Should You Buy the Power Play, Sizzler, or Megaplier?

As Mega Million lottery interest has grown since the January 2011 record Jackpot of $355 milllion, many players continue to ask:

Should I Buy the Megaplier Option?

As originally advised,
The correct answer remains both Yes and No!
It depends on the size of the Jackpot,
And Your Strategy.

How would you know when to buy it?
If your lottery playing strategy is to win the Jackpot, we advise that you always buy the Megaplier option whenever the current jackpot value is below its Jackpot Breakeven level.

• For Mega Millions, Breakeven is now $53.1 million: Buy the Megaplier Option whenever the Jackpot is below this value. Never above this. Buy 2 tickets instead.

However, if you strategy is to maximize your prize winnings by religiously playing a consistent set of  numbers, we recommend that you always buy the Megaplier.


Effect of Change?
Because the 2nd place prize is now always fixed, the amount of money returned to Megaplier players has also increased. The net effect of this increase means that the Mega Millions breakeven has increased by $5.9 million from $47.2M to $53.1M.

Note, however, that as the Jackpot increases above its minimum, only the probability weighted amount of jackpot money returned to players increases. This means that all other prize payouts are fixed. Thus, there is always a fixed point (jackpot level) at which the return of single ticket payouts equals the return of the Megaplier ticket payouts.

As lottery players, we want to play the option that returns the most money back to us, the players. As you will see below, your option changes depending on the jackpot level.

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Mega Millions Megaplier
When a player buys the Megaplier option, all  prizes that the player wins, except the Jackpot, will be multiplied by either 2, 3, or 4, depending on what Megaplier was selected. Additionally, the new rules fix the 2nd place prize Megaplier multiplier at 4, regardless of what was picked. This means that the top non-jackpot prize for matching 5 white balls is always $1,000,000. Accounting for this new change, the probability weighted average of all other non-jackpot prizes remains at a multiplier equal to 3.476 times.

Based on this information, the graph below illustrates both the expected Megaplier return (in blue) against the expected return of a single Mega Millions ticket without the Megaplier (in red).

When the jackpot is set to the minimum $12 million, Megaplier returns $0.367 (increased from $0.350) of each dollar received, compared to $0.250 for those without the option.

When the jackpot level reaches $53.1 million, both tickets with and without the Megaplier returns $0.484 of each dollar received. We refer to this $53.1 million as the Jackpot Breakeven level. (Note that previously, the breakeven return was $0.451 at a $47.2M level).

Above this breakeven level, tickets purchased without Megaplier return more to the players. When the jackpot grows to $90 million, $0.694 is returned to straight ticket holders compared to only $0.589 (previously $0.572) to those who bought the Megaplier.







Because the new Megaplier rule is now in effect in most Mega Millions states, the overall monetary return of money received has increased.

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Conclusion
We suggest that all lottery playersshould purchase Lottery Tickets like they would any other investment, and always seek the highest return on their dollars. Thus, when the Mega Millions jackpot is below $53.1 million, the Megaplier should be purchased. When the jackpot is above this level, never purchase the Megaplier. Go for the Jackpot instead.


Learn More
To learn more about this subject, visit our in-depth pages that provide the detailed numbers behind each of these options.

• Revised Mega Millions Megaplier Analysis (February 2011)
• Superceded Mega Millions Megaplier Analysis (Original)
• Powerball Power Play Analysis
• Hot Lotto Sizzler Analysis

The Average 18 Year Old Has 6,255 Chances to Win the Lottery

Have you ever wondered how many chances you have to win a major lottery in your lifetime?

We too have asked ourselves this question many times. So we consulted the U.S. World Factbook and found the average life expectancy of a U.S. resident is 78.4 years. Since a person must be 18 years old to legally purchase lottery tickets, we find that a person has about 60 years in which they can buy Powerball, Mega Millions, or other lottery tickets.

Since these major lotteries have drawings twice a week, there are 104 opportunities to win each year. Multiplying 104 times 60 years, we obtain 6,240. Because of leap years, a player gets another 15 drawings to play. Adding 6,240 and 15 together, we find that there are a total of 6,255 drawings that may be played

Thus, we conclude, that: The Average 18 Year Old Has 6,255 Chances to Win the Lottery

As you get older, the number of opportunities becomes smaller. You can check the table below to see how many drawing you may have left to play.

Age	Drawings
18	6,255
20	6,047
25	5,526
30	5,005
35	4,483
40	3,962
45	3,441
50	2,920
55	2,398
60	1,877
65	1,356
70	835
75	313

Note: These are only averages. Unfortunately, some players may pass away before they reach 78 years old. Others who are more fortunate, can have many more years left to dream.

Lottery Full Wheel Calculators Released

We are proud to announce that we have begun to roll out our new Full Wheel Payout Calculators for the following lotteries:

• Mega Millions Full Wheel Calculator
• Powerball Full Wheel Calculator
• Hot Lotto Full Wheel Calculator 

You can access these pages from the links above, from our Lottery Research Page, or the "Lottery Combo Tables" link on our Lottery Power Picks home page.

While we are still in the bug/shakeout mode, we have decided to provide these calculators to you in a phased mode.

The purpose of these pages are to help you, the lottery players, better understand how much money: it would cost you to purchase a full lottery wheel; you would win if any or all of your numbers were to appear in the associated lottery drawing; and, lastly, how much your profit or loss from that transaction was.

During the coming weeks, we will be testing these pages to make sure that everything works properly. We will also be expanding these pages to include all of our covered lotteries.

We hope this information is helpful and gives you more information about the financial risks associated with playing the large lottery games.