A lottery is a game of chance where winners are selected through a random drawing. Financial lotteries are typically run by state or federal governments and involve multiple people buying a ticket for a small amount of money in order to have a chance at winning a much larger prize, often in the millions of dollars.
Those who win the lottery can choose to receive their prize in one lump sum payment or an annuity (payments over time) with tax withholdings. While many lottery participants expect to receive their prize in a lump sum, it is important to consider the time value of money and income taxes when making this decision.
For some individuals, the entertainment value or non-monetary benefits obtained by participating in a lottery may be high enough to outweigh the expected monetary loss. For example, an individual might play the lottery in hopes of finding a cure for cancer or to win an expensive vacation.
For others, however, the odds of winning are so long that the prospect of losing a large sum of money outweighs the potential enjoyment from playing. These individuals are likely to continue playing the lottery in the hope that they will ultimately win a prize. In some cases, this can be a very costly habit, especially for lower-income individuals who are likely to spend more on tickets than those in higher-income groups. Khristopher J. Brooks is a CBS MoneyWatch reporter who covers business, consumer and financial stories. He has written about everything from housing issues to bankruptcy.