You’ve Just Won the Lottery (of Information)!

Shefali Murti
Animal Spirits
Published in
3 min readDec 3, 2022

--

Interested in the lottery right now? Thank the current interest rates!

Powerball(Multi-State Lottery Association (MGN))

The Powerball lottery is currently at a record high of $1.9 billion. Though there were no lucky winners at the last drawing, there’s another chance tonight (Monday, November 9) at 11PM (EST). Now, $1.9 billion is an impressive number, and one that will attract countless lottery ticket purchasers. But this number is deceptive. For winners, it’s not always as dreamy, as simple, or as large of a sum of cash, as it sounds.

Winners have two options when scratching off all the correct numbers on their Powerball ticket: collecting the money as a lump sum or as an annuity. Notice the very small text titled “Cash value: $929.1 million” on Powerball’s website? It’s right under the very large text of “estimated jackpot: $1.9 billion”, if you’re still struggling to find it. This refers to the lump sum option–the smaller cash amount of money a winner gets if they choose to collect their reward at one time. And this is before copious amounts of taxing, of course.

The second option, and the one that no one has chosen since 2014, is the annuity. This is when the winners receive the estimated jackpot at a fixed rate over 30 years. Though most usually choose lump sum, the record breaking jackpot right now is making this option a lot more enticing.

Image by Rich Pedroncelli (found on NPR)

First, why did Powerball reach an all time high right now? This can be credited to none other than Federal Reserve Chair Jerome Powell for raising interest rates by .75%. According to Nasdaq, the $1.9 billion prize reflects the value that the lump sum prize will be worth after investing it in government bonds for 30 years. The Fed’s interest rate is nearly double what it was at the beginning of this year, and with higher rates comes a higher jackpot prize, as we can see right now.

As we can see, the ability to fund a higher total prize over time comes at the expense of a much lower lump sum prize. If I were a winner, I would definitely think twice before choosing to take the lump sum. Taking the lump sum means immediate liquidity (cash) and the opportunity to invest. However, this comes at the risk of not using your money smartly–whether that refers to poorly investing or simply burning through the cash too quickly…and, what you receive is half of what the actual jackpot amounted to. With annuity payments comes less immediate liquidity and unpredictable tax rates per year, but a guaranteed flow of cash and a much, much higher total sum of money.

I originally was going to give my take on which option I would choose if I were to hypothetically win this jackpot. But now I’m realizing that decision is harder to make than I first thought. The Gen-Z brained, fun college student, ‘YOLO-er’ in me says just take the lump sum because you never know how long you have left. But the economically educated, JOUR469 student part of me is thinking a lot more deeply about the repercussions of each of these decisions. I’m in the clear for now since I didn’t buy a ticket. However, if no one wins tonight (I can’t tell yet because the website still says “results pending”), I may test my luck and my new knowledge about the lottery at the next drawing.

--

--