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Weekend reading: Assessing probability

Money blog articles

My weekend musings, plus the week’s links.

I have long maintained that it’s perfectly rational to buy a £1 lottery ticket if you want to.

This bemuses friends who know me as a bit of a money maven.

Don’t you realize, they ask, that you’re more likely to be hit by a meteor, while being watched by a bobby who is genuinely on the beat, on a sunny September day in usually ever-grey London?

Well, yes I realize the odds are insanely long. But the potential gain is absolutely ridiculously high, and the cost of playing is just £1.

And the real risk isn’t even the hard-to-quantify one that I will or won’t win, but the near-certain one that I will feel miserable for skipping the £1 ticket when I see the latest millionaire in the paper.

I’m not special in this – it’s what lotteries are founded on. “You’ve got to be in it to win it” the Australians say. It’s hope held hostage over expectation.

It helps that I rarely feel the need to play the lottery. I buy maybe ten tickets a year, and £10 isn’t much to assuage my worry of missing out.

I once worked out that the payout was better than with premium bonds, which also helps.

Academic backup

Happily, there’s also academic thinking that backs me up on this, as discussed in the Q&A of this archived TED talk:

It’s all good, but watch the Q&A for the case for playing the lottery.

From the blogs

Mainstream money stories

  • The Great Wall: Foreign investment in China – The Economist
  • Job title inflation [From June] The Economist
  • Merryn still thinks the market is expensive – FT
  • Warning over non-‘bonds’ [told you]FT
  • Investors could claim millions in overseas tax – FT
  • Gold hits new peak of $1,283 – Telegraph
  • Don’t underestimate income – The Independent
  • Plenty of value stocks out there – New York Times
  • Rents increasing as first-time buyers frozen out – Guardian
  • And finally… evils of cyanide fishing on coral reefs – Guardian

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{ 3 comments… add one }
  • 1 Faustus September 18, 2010, 5:01 pm

    The question of the minimum income necessary to live satisfactorily will never be fully answered, but Len Penzo’s post reminded me of some widely noted research by the Joseph Rowntree Foundation a couple of years ago:

    http://www.jrf.org.uk/sites/files/jrf/2226-income-poverty-standards.pdf

    They suggested a Minimum Income Standard should apply, below which people would suffer hardships. Their thresholds were calculated at £258 gross per week for a single adult, and £516 for a couple with two children. That comes I think to a salary of about 13K for a single adult, and 26K for a family of four in the UK, which pretty much equates to Len Penzo’s sum, though my guess is that the cost of living in the US is on the whole lower.

    I usually keep this in mind for my own living costs, and would be interesting to find out what others think of what should constitute a minimum income standard.

  • 2 The Investor September 18, 2010, 5:29 pm

    Hi Faustus – Would depend partly on where you are in the UK? In Zone 1-4 (possibly 6) of London you couldn’t cover 1-bed rent alone for £13K, although of course you could and would share. Even then it’s going to be at least £400 a month, and more likely nearer £600, for a room in a share house, which will eat roughly half that income.

    That aside, your figures sound about right to me, though they allow no provision for saving.

    Len’s post has gotten all over the Internet! Glad to see he’s getting some much deserved recognition for his excellent and funny blog at last.

  • 3 Neil Wilson September 19, 2010, 8:53 am

    The other great beauty of probability is of course that they are independent events.

    Therefore the most rational way to play it is to save up the money every week in an ‘above inflation’ account and put the entire lot on in a week when there is a triple rollover (using lucky dip of course to avoid the prospect of bias).

    The biggest problem at the moment appears to be getting an above inflation return…
    .-= Neil Wilson on: The solution to the European debt crisis =-.

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