Why am I writing a blog to help you teach your kids about the lottery?
I found that teaching my kids about the lottery opened up a number of interesting money conversations and meant I could introduce them to some aspects of Behavioural Finance (which I love).
The main areas covered in this blog are:
At the end of this blog, see if you can answer my pop quiz question correctly!
What is a lottery?
Not sure you need my help here but I thought I'd add something for completeness.
"Imagine the lottery like a big raffle where people buy tickets with numbers. They hope their numbers get picked to win prizes, like lots of money. But winning is super-duper hard, like finding a needle in a haystack. Most people don't win. So, it's like a fun game for grown-ups, but it's not how we plan to get money."
Odds of Winning the Lottery
I wanted to help my daughters understand how likely it is for someone to win the jackpot on the lottery. If we take the UK lottery where you have to match 6 numbers, the odds of winning the jackpot are 1 in 45 million.
To put that into context, winning the lottery is less likely than flipping a coin and getting 25 heads in a row.
If you want a peaceful weekend, challenge your kids to get 25 heads in a row.
As I'm a bit of a geek, I found out that if you flipped a coin every 3 seconds for 12 hours a day, it is expected to take you nearly 6 years until you get 25 heads in a row!
Why do most countries have a lottery?
If the lottery is a form of gambling, why do most countries have a lottery and seem happy for everyone to play it? Surely they don't want to promote gambling!
The reason for the lottery is to encourage people to give money to charity. When people buy a lottery ticket, some of the money goes towards the winner's pot and some of it goes to charity.
Essentially, the lottery is a clever way of getting people to give to charity without them really realising they are giving to charity as most people are just focused on the potential winnings for themselves.
As a result of the lottery, most countries have been able to raise millions for many different charities. So whilst gambling is seen as a bad thing, the countries see that the benefits to charity outweigh this downside.
Side note: The use of the lottery is being considered to help encourage other behaviours. For example, there have been discussions to introduce a lottery element to retirement schemes. This means when people put in extra money into their retirement fund some of this would be invested into their individual savings pot for retirement and some to a collective pot which will be 'won' based on a lottery. This could lead to more people putting extra savings away for their retirement which is much needed.
Why do people play the lottery?
As you can imagine, if your kids understand that the chances of winning the lottery are so low, they might ask "Why do people play the lottery?"
The main reasons are:
A life-changing amount of money
Not understanding the odds
The low cost of play
Let's explore these points further:
A life-changing amount of money:
The amount of money you can win is massive. In the UK the Jackpot is usually around 5 million pounds! The Jackpot amount is advertised very heavily. This is Anchoring people to this high amount so more people will play.
For people who live a comfortable life now, they would be able to stop working and buy all the luxuries they desire. The big house, nice clothes and expensive cars.
What's more interesting is when you look at people who don't have money now. Many of them play the lottery as they see it as the only way to have a better life.
I remember watching a short video of an interview with someone who had very little and they would rather spend their last little bit of money on a lottery ticket than a meal. They said,
"Missing a meal won't kill me, but a winning lottery ticket could change my life"
In that context, it is easy to see why a majority of people who play the lottery are those on low incomes.
This is why it is so important to teach kids about money so that they see that there are other ways to change their lives (financially) for the better without relying on the lottery.
As I'll touch on later, whilst winning the lottery can be life-changing, it's not always for the better.
Another geeky piece of information: Whilst I don't ever encourage gambling, if you started with £1 on the Roulette table, guessed Red correctly, and put the winning back on Red a further 25 times, you'd have the same chance of winning the jackpot on the UK lottery. However, you'd win over £67,000,000 compared to the average of £5,000,000 from the lottery.
Not understanding the odds
People are generally terrible at understanding the probability of winning
We hear about lottery winners in the media. This distorts people's views on how likely it is to win the lottery. We see the winners and think 'If they can win, then maybe I can' or 'That could be me if only I play every week'. This leads to a form of Risk Aversion as people will play the lottery as they feel they are missing out on the large winnings if they don't play when everyone else is.
As people feel the probability of winning is higher than it actually is, they feel happy to take that chance.
Unfortunately, we don't get to see the tens of millions of people who didn't win the lottery each week. If we could see this, then I'm sure fewer people would play.
Side note: The media distorts the probability of most events, not just the lottery. Statistically, the world is safer now than it has ever been, yet people feel less safe than in the past. This is due to bad events getting more coverage now than ever before (as social media expands) and therefore people believe there are more bad events.
The Low cost of play:
It only costs a couple of pounds, dollars, or euros to play the lottery. For most people, losing this money each week doesn't make any impact on them. Essentially, there is a high potential upside and minimal downside.
Again, another behavioural finance aspect comes into play. Once people have been playing the lottery for a while, they feel like they have to keep playing as they have 'invested' so much already. This is known as the Sunken Cost Fallacy.
As mentioned above, whilst I don't encourage gambling, if you are going to gamble with small amounts, you are much better off going to the casino and trying to get 26 consecutive reds on the Roulette table.
I don't want my kids to be wasting their money as they grow up. I want them to appreciate the odds of outcomes and put their money where it has a good chance of growing.
The Downside of Winning the Lottery
Sadly, many people who win the lottery don't stay rich for very long as they don't know how to manage this money. They fall prey to the Diderot Effect.
The Diderot Effect means they start buying things they couldn't previously afford which is fine to start with as they have loads of money. However, they don't plan for the future and soon find out that maintaining their lifestyle is very expensive and they run out of money.
For those who had a comfortable life before winning, the process of winning and then going back to where they started is more painful than not having won in the first place.
I mention this as it's a really important lesson for our kids. Having money without the knowledge of how to manage it can have material downsides. This is why, no matter how much money your kids do or do not have, they need to learn to follow the 3 Rules of Wealth.
Talking to your kids about the lottery can open up many different money conversations.
The topic will hopefully help your kids consider the probability of certain things happening. Also, talking about the Lottery can help you introduce some aspects of Behavioural Finance such as Anchoring, Risk Aversion and the Sunken Cost Fallacy,
Of course, this topic can open up a conversation about gambling. If you'd like to continue teaching your kids about this topic then please see my blog: How to teach your kids about gambling
Let's see if you've been paying attention by answering this pop quiz question:
Which of the following has the highest chance of your kids becoming wealthy?
Buying them 10 lottery tickets, or;
Buying them a copy of the kid's money book, Grandpa's Fortune Fables 😊
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