Lottery

Consider a lottery in which a person picks six numbers from the numbers 1 through 50
with no repetitions and pays $1.00 for a ticket with those numbers.

Suppose the player is paid if his/her numbers matched three or more of

the numbers selected in a televised (say) drawing.

Let
X = number of matches in a ticket
h(x) = the payoff for the event {X=x}, i.e., if x numbers were matched

The payoff table is given below.

x h(x)
0 0
1 0
2 0
3 3
4 89
5 1268
6 4000000

Assumption:

The winning numbers are selected randomly without replacement from 50 numbers.

Probability Mass Function of X:

It can be shown that the number of different ways to match x numbers out of 6 are as follows:

x No. of Ways
0 7059052
1 6516048
2 2036265
3 264880
4 14190
5 264
6 1
15890700

Since every combination of 6 numbers is equally likely to be chosen, we have:

x P(x)
0 0.44422536
1 0.41005418
2 0.12814193
 3 0.01666887
4 0.00089298
5 1.6613E-05
6 6.293E-08
1

(This is called the hypergeometric distribution.)

The Expected Value of X:

E(X) = 0.72

Clearly, we should be more interested in the expected value of the payoff E(h(X)), which we compute next.

The Expected Value of h(X):

To compute this, we apply formula (10) in the notes:

E(h(X)) = 0.40226686

Thus, we are only getting 40 cents back, on average, for a one-dollar ticket. There is an average
60 cents per dollar!

A New Payoff Function:

Now, if the grand prize of a particular drawing is not won, the grand prize for the next drawing is
often increased; and this could repeat multiple times. Suppose the grand prize reached $20,000,000.
What is the new expected payoff?

x h(x) (h(x))^2
0 0 0
1 0 0
2 0 0
3 3 9
4 89 7921
5 1268 1607824
6 20000000 4E+14

New E(h(X)) = 1.4091451

Thus, the expected payoff increased substantially! We are getting an average profit of 41 cents per dollar.
Does this now make buying a ticket a worthwhile investment?

Variability/Risk of h(X):

The truth is that only very rarely do we get back anything from our one-dollar investment.
To quantify this, we now compute:

V(h(X)) = 25171988
SD(h(X)) = 5017.16931
CV(h(X)) = 3560.43485

Thus, h(X) has astronomical variability!

Due to the extreme risk of this investment, it would be wise for most people to keep their one dollar.
This is despite of the average profit of 41 cents per dollar of investment.
e as follows:
, which we compute next.

e is an average loss of

next drawing is
ached $20,000,000.

ofit of 41 cents per dollar.

ep their one dollar.