Here is a data point you may want to keep in the back of your mind when discussing financial literacy:
In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006).
Some may be tempted to interpret this as the Death of the American Dream, and evidence that people are hopeless about their economic futures. But winning the lottery as the best retirement strategy for all Americans? I chalk this up to the phenomenon that no matter how stupid a belief is, if you know one person that ascribes to it then a survey will show that 1/4 to 1/3 of the population probably does as well. This includes the existence of witches and werewolves, and the fact that Saddam Hussein planned 9/11. That, and I blame the fact that people don’t understand the concept of a fair bet and thus, of course, an unfair bet. Talking about insurance with the average person can be shocking and illustrative. This is why auto insurance companies run commercials promising to be forgiving of accidents and generous with benefits and this is somehow persuasive to customers. “Where does that money come from?” I want to ask them…. “where does that money come from?”.
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Wednesday ~ August 17th, 2011 at 9:00 am
Alex Godofsky
To be fair, actually winning the lottery really is an excellent retirement strategy for any given individual American. It’s just hard to pull off.
Wednesday ~ August 17th, 2011 at 1:13 pm
Eric Morey
…so is actually founding a multibillion dollar company. It is just hard to pull off.
Thursday ~ August 18th, 2011 at 9:17 am
Serolf Divad
Agreed. Winning the lotter is an excellent strategy and I’d totally do it all the time if I could figure out how.
Now, playing the lottery on the other hand…
Your tongue in cheek comment does, however, point out one of the problems with these kinds of surveys: there is enough amibuity in the question asked that you can’t quite be certain what the respondent actually meant.
Thursday ~ August 18th, 2011 at 2:46 pm
neil
I think this is probably right. Of course winning the lottery is a good strategy (it’s a lot easier than founding a successful company!). Playing the lottery, maybe not so much…
Wednesday ~ August 17th, 2011 at 10:45 am
foosion
If you have zero prospect of accumulating several hundred thousand dollars by conventional means, and have slightly more than zero chance of winning the lottery, then the lottery is your highest probability alternative.
People tend to assume that others are rather similar to themselves.
21% is lower than the percentages typically cited for loony beliefs, Almost three times as many don’t believe in evolution (either affirmatively say no or have no opinion).
Wednesday ~ August 17th, 2011 at 11:17 am
David Ashleydale
I always hear people say that having insurance saves them money. But if everyone saved money by having insurance, insurance companies would go broke. The money has to come from somewhere!
The only point to insurance is to handle large costs that you normally couldn’t. But on average, you should expect to pay a little more over your lifetime than if you had no insurance. Otherwise, the insurance companies would not be making a profit.
Wednesday ~ August 17th, 2011 at 1:04 pm
12thmonkey
You must really have no experience with the poor. If the median annual wage in America is about 24k, how can anyone at or below that number hope to accumulate wealth? Is there some magical place the poor can live that would allow them to save money while living on such low wages? To the poor, a dollar to win a million is infinitely more realistic than trying save money to have a million dollars. Your piece sounds like those people who are born on third base and think they hit a triple- then they complain when no one else tries to HIT a triple.
Thursday ~ August 18th, 2011 at 8:52 am
DM Andy
I’m with the others, if you’re asking someone on $25,000 a year how to accumulate $500,000 plus by the time they retire how else are they going to do it?
Thursday ~ August 18th, 2011 at 9:32 am
wvmcl
Agree that attitudes towards insurance are often bizarre. It’s not an investment, it’s protection. The best possible outcome is that you pay for fire, medical, property, auto insurance your whole life and never use it at all, because nothing bad ever happens to you!
As for life insurance, most of us don’t want to die early to get a good return on investment.
Thursday ~ August 18th, 2011 at 9:46 am
yoyo
Guys, an insurance company that did exceptionally well investing the “float” could indeed choose to pass on some of those gains to consumers. Not sure they would, but they could. Probably worth acknowledging if the topic is “financial literacy.”
Thursday ~ August 18th, 2011 at 1:20 pm
Steve
So, what you’re saying is that insurance companies should invest the “float” in lottery tickets?
Thursday ~ August 18th, 2011 at 1:49 pm
randomlife310
Good point and that would be the way I would try to run my insurance company if I had one.
I’d love to see some stats on how much money the average person pays (or gains) by having insurance over their lifetime.
Thursday ~ August 18th, 2011 at 9:53 am
Mike Cagle
In theory, you (or I, or some other person) could win the lottery. But, not even in theory could “all Americans” win the lottery. That’s the especially crazy idea.
Thursday ~ August 18th, 2011 at 9:56 am
GT
This is a long time in the making. Republicans profit from an ignorant electorate.
Thursday ~ August 18th, 2011 at 10:06 am
Layne
I wonder how many of those 38% under $25,000 whose answer was “winning the lottery” were being tongue-in-cheek. If someone asked me the same question, I’d be tempted to say the same thing. Not because I believe it, but as a commentary on the economic conditions of the working class.
Thursday ~ August 18th, 2011 at 10:08 am
Bill Thomas
If you earn less than 25k per year (and lack health insurance and/or have relatives/dependents who have little or no income that you need to help provide for), winning the lottery, although an extreme long-shot, may not seem that much more implausible that socking away the money necessary to accumulate hundreds of thousands of dollars in retirement savings.
That being said, I think that it’s really important to teach financial literacy to young people–the importance of saving, insurance, etc, and the study does suggest that we need to do a lot of work in this area. Maybe the place to start would for lottery ads to demonstrate clearly, graphically, and memorably how unlikely participants are to win a substantial amount of money.
Tuesday ~ August 23rd, 2011 at 2:30 pm
Floccina
But some people of very modest means ($20K/year) do drop $50-100/week on the state lotteries.
Saturday ~ August 27th, 2011 at 12:10 am
Bill
And that, I think, is a shame.
Thursday ~ August 18th, 2011 at 10:16 am
BIll
The lottery is just a tax for being stupid.
Thursday ~ August 18th, 2011 at 10:21 am
Eoin Cannon
I don’t think the 16% number on “all Americans” is surprising or even evidence of ignorance. That’s just the portion of people who assume most people are as financially screwed as they are. I bet if you measured the portion of rich people who have similarly narrow social imaginations, you’d get a higher number.
Thursday ~ August 18th, 2011 at 10:26 am
MikeH
I don’t see anything in the post that indicates that the folks questioned said that buying lottery tickets should be the ONLY component of a retirement strategy, just that it was the best chance to end up with an otherwise unattainably large amount of money at retirement. As a hard-working, 58-year-old middle-class American with a 401-K and an IRA, if you asked me the most likely way that I could accumulate a million dollars before I retire, I’d have to say that winning the lottery (I’ve always purchased 1 ticket per week) is not only the best, but the ONLY way that that could happen., and my family income is considerably more than $25K. It has nothing to do with ignorance or a belief that that is actually going to happen. It just a purely pragmatic analysis of the probability that I’ll ever have a million dollars. For someone making $25K or less, the odds of them ever accumulating hundreds of thousands of dollars is probably right in line with the odds of winning the lottery…several million to one. You can sneer about people’s ignorance, but a dollar a week invested in the lottery is not a bad gamble for someone in that situation. That lost dollar is not going to have much of an impact on their current situation, but it turns a zero chance into a longshot.
Tuesday ~ August 23rd, 2011 at 2:35 pm
Floccina
One in six households that includes young households.
http://www.businessweek.com/investor/content/jun2011/pi2011062_946842.htm
Singapore seems modest by some measures: Median income among working households was only about S$5,700 (about US$4,500) in 2010, according to the Singapore Department of Statistics. Yet in this small island nation of only 5 million, known for extravagant shopping, high-end restaurants, and draconian chewing-gum laws, nearly one in every six households has more than $1 million in assets, making it the densest population of wealthy households in the world, according to a new report by Boston Consulting Group.
Thursday ~ August 18th, 2011 at 11:39 am
Bill
The comment that the lottery is a tax on stupidity is both unoriginal and supercilious. In fact, it is a tax on desperation. It is incredibly regressive and a shameful scam on the poor.
Thursday ~ August 18th, 2011 at 11:40 am
nylund
In Massachusetts, when the lottery jackpot gets too high, they “rolldown” the extra money to the easier to win smaller prizes. During these few 4 week periods:
“It takes $100,000 just to give a 74% chance of walking away profitably from this draw. And around $500,000 to virtually remove any risk….Statistician Mohan Srivastava says that if you buy 200,000 tickets for this game during a particular 4 week period, you would likely make somewhere between $240,000 and $1.4 Million profit.
He also adds that there are 5 top players of Cash WinFall that make between $1 Million and $6 Million profit every year.”
There are a few groups who spend hundreds of thousands of dollars on the lottery during this period and fairly reliably make a profit year after year.
http://blog.lottery-syndicate-world.com/elderly-couple-spend-614000-on-lottery/
So, in some cases, cashing out your 401k and buying lottery tickets may not be such a bad idea!
Then, of course, there is also the tale of the Texas lady who has won a multi-million dollar jackpot on 4 different occasions. Is it luck, or might she, with her Ph.D. in statistics from Stanford have figured something out?
http://www.dailymail.co.uk/news/article-2023514/Joan-R-Ginther-won-lottery-4-times-Stanford-University-statistics-PhD.html
Or, there is the case of the math nerd that broke the code for a scratch off game in Canada:
http://www.wired.com/magazine/2011/01/ff_lottery/all/1
But note that the first example doesn’t require any particular set of skills…just a willingness to spend a whole lot of money on tickets.
Thursday ~ August 18th, 2011 at 12:24 pm
randomlife310
I also question whether or not everyone really needs to accumulate “several hundred thousand dollars” of wealth for their retirement, especially if they are normally in the $25K income range.
Perhaps if the survey question had instead been worded, “What do you think is the most practical strategy for accumulating enough wealth for your own retirement?”, people wouldn’t have chosen the lottery with such a high percentage.
Thursday ~ August 18th, 2011 at 2:36 pm
Bill
Come to think of it, the original survey question almost seems designed to elicit sarcastic responses.
Thursday ~ August 18th, 2011 at 1:27 pm
dailyMuckraker » “Winning The Lottery Was “The Most Practical Strategy For Accumulating Several Hundred Thousand Dollars” Of Wealth For Their Own Retirement”
[...] Adam Ozimek: Some may be tempted to interpret this as the Death of the American Dream, and evidence that people are hopeless about their economic futures. But winning the lottery as the best retirement strategy for all Americans? I chalk this up to the phenomenon that no matter how stupid a belief is, if you know one person that ascribes to it then a survey will show that 1/4 to 1/3 of the population probably does as well. This includes the existence of witches and werewolves, and the fact that Saddam Hussein planned 9/11. That, and I blame the fact that people don’t understand the concept of a fair bet and thus, of course, an unfair bet. Talking about insurance with the average person can be shocking and illustrative. This is why auto insurance companies run commercials promising to be forgiving of accidents and generous with benefits and this is somehow persuasive to customers. “Where does that money come from?” I want to ask them…. “where does that money come from?”. [...]
Thursday ~ August 18th, 2011 at 4:07 pm
Halloween Jack
The ad that’s served up with this entry for me is for a BMW Z4. I’d laugh if I could afford to.
Sunday ~ August 21st, 2011 at 11:40 pm
billy
OK, admittedly, the lottery MAY not be a very practical way for someone capable of earning less than $25,000 to come up with “several hundred thousand dollars”. BUT author: Pray tell us how else someone who earns
less than enough to live on CAN set aside half a million dollars?? Particularly
someone over the age of 40 who expects to never earn enough to live on??
These people may not be as illiterate as you think they are.
Tuesday ~ August 23rd, 2011 at 2:22 pm
Floccina
http://un-thought.blogspot.com/2010/11/i-idea-for-lottery.html
If Governments where benevolent they could:
An Idea for the Lottery
The state lotteries have been called a tax on stupidity and predation on the poor but I have an Idea for a savings lottery, you have an account and you buy lottery tickets in the account. 50% of the money that you spend on tickets goes into an investment account, 10% goes to the retailer, 10% goes to the state and 30% is paid out in winnings.
http://un-thought.blogspot.com/2010/12/state-lotteries.html
Tuesday ~ August 23rd, 2011 at 2:37 pm
Floccina
Also most people SS is worth more than $100k.
Sunday ~ February 19th, 2012 at 11:58 pm
consumer choice theory and “goal-oriented behavior” | theunlikelyeconomist
[...] There’s also this from Modeled Behavior. Winning the lottery as the best strategy to accumulate several hundred thousand dollars. Enjoy.) [...]