The Lotto Jackpot Edition

Zach Seward (ZS) is a journalist and media entrepreneur who co-founded the business news organization Quartz, where he worked until earlier this year. Now he’s blogging at zachseward.com while figuring out what’s next.

Zach here. Lotteries are obviously a scam, but did you know the scam is getting worse?

The jackpot for tomorrow’s Mega Millions drawing is advertised at $1.55 billion. Just last month, Powerball's top prize also hit 10 figures. Indeed, huge jackpots are increasingly common in the two major American lotteries:

This is not happening by chance. One factor is that players face longer odds of winning it all. In 2015, Powerball added 10 white ping-pong balls to its drawings, which made smaller prizes, for matching just a few numbers, easier to win, but the jackpot more elusive. Mega Millions did the same thing in 2017.

The other reason is that lotteries inflate the value of their jackpots, and current economic conditions are compounding the lie.

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Why is this interesting?

You probably know that lottery jackpots are expressed two ways: the "cash value" and "advertised value." The cash value is based on revenue from ticket sales, after retailers and state lottery groups take their cut and other prizes are doled out. If nobody hits the jackpot, the prize pool carries over to the next drawing. In other words, the cash value is the actual amount of money waiting in the pot.

Advertised values, on the other hand, are projections of how much money the winner could accumulate by allowing the lottery to conservatively invest the cash jackpot and pay out a little at a time, otherwise known as an annuity. The specific investment strategy employed by Powerball and Mega Millions is to purchase long-term, zero-coupon bonds from the U.S. government. Treasury yields have been going up, which makes the annuity a better investment than it used to be. As a result, advertised jackpots are now running at roughly twice their cash value:

The cash value is often presented as a "lump-sum option" for those impatient to collect their winnings at a discount. But it's the opposite: The lump sum is all there is, and the additional funds that get you to the advertised value are generated by investing the money, which the winner could do on their own.

Of course, the advertised value is what gets, well, advertised—by the lotteries themselves and in frenzied media coverage whenever the number grows large enough. Huge jackpots are the lifeblood of any lottery, dangling unimaginably large sums in the face of vanishingly small odds. They keep regular players chasing an impossible dream and the broader public interested in lotteries, too.

This is a pretty grumpy take on my part, I know. But lotteries prey on the poor, and the hoopla around billion-dollar jackpots abets these state-sponsored scams. (ZS)

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Thanks for reading,

Noah (NRB) & Colin (CJN) & Zach (ZS)

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