Today I read yet another article on CNN about how poor people play the lottery more than rich people. There is another big lottery pot out there.
http://www.cnn.com/2012/08/15/health/psychology-playing-lottery-powerball/index.html?hpt=hp_t1The interesting part of this was that the brought up a study about the nature of how people risk money and called it the "peanut effect"
In 2008, researchers at Carnegie Mellon University attempted to explain why the poor are more likely to buy lottery tickets.
The study, published in the Journal of Behavioral Decision Making, theorized that people focus on the cost-to-benefit ratio of a single ticket rather than add up the long-term cost of playing over a year, or a lifetime.
Some study participants were given $1 at a time and asked if they wanted to spend each dollar on a lottery ticket, author George Loewenstein said. Others were given $5 and asked how many tickets they wanted to buy with the money. Members of a third group were told they could either spend $5 on lottery tickets or buy none at all.
People in the second group bought half as many as those given $1 at a time. In the all-or-nothing scenario, 87% of the study participants purchased zero tickets. The researchers' findings were consistent with something known as the "peanuts effect."
"There are money amounts that are small enough that people almost ignore them," Loewenstein said Wednesday.
"It almost doesn't feel real. The lottery and penny slots are kind of the sweet spot of risk taking. They're really cheap, really inexpensive to play, but there's a big possible upside."What is really interesting here is that if you were to play the lottery weekly for one dollar for 30 years, whereas you could have deposited it in a 5% bearing account instead, you would lose $3347 (according to a random calculator I chose on the web).
Based on this study, if you suddenly had that amount, would you gamble it for a chance to win hundreds of millions?
But there is more....
I realized reading this is that this doesn't just apply to lotteries. It applies to everything.
If you buy a $2 coffee every day at a coffee shop rather than brew it yourself for less than a buck, you might be doing the same thing---but several times a week instead on once a week. The odds of winning anything though, by spending a buck more a day, are zero.
So the question is, is buying a brew for two bucks at a coffee shop ever day (5 day week) is worth $17000 of our life savings over thirty years at 5% than making it at home?
Maybe! Maybe the escape is worth it. Maybe the social aspect it worth it.
But maybe there are 10 other things we do daily that are a waste of a buck!!!!!
ten times $17,000 is $170,000.