With an estimated Powerball Jackpot of $1.5B, everybody is talking about it right now.\u00a0 I’ve got my tickets, but with a prize that big, I’m having an easier time listing the things that I can’t buy with the money, rather than what I can.\u00a0 That said, I keep coming back to a concept that statisticians refer to as “expected return”.\u00a0 What it means is that even though your odds of winning the Powerball aren’t changing (roughly 1 in 292 million), the bigger the jackpot, the bigger the expected return.\u00a0 To calculate it, just take the odds and multiply by the reward value.<\/p>\n
1\/292m x $1.5B = $5.14<\/p>\n
So, before you factor in taxes, the possibility of splits, and other factors that might affect your reward, the expected return is something like $5.14 on a $2 ticket.\u00a0 Not too bad.\u00a0 Factoring in the cash option ($930M), a 40% Federal tax, an extra 25-28% tax from the IRS for gambling winnings, and perhaps even state taxes, however, this number drops well below the $2 range making it far less appealing to buy a ticket.\u00a0 I found interesting articles in Business Insider<\/a> and Wired<\/a> that elaborate further on this idea.<\/p>\n The same concept can be applied to poker in what they refer to as “pot odds”.\u00a0 You take the odds of a winning hand and multiply it by the size of the pot.\u00a0 In poker, often times players are more willing to play what is normally a statistically losing hand if it gives them a shot at more money (ie. a bigger pot).<\/p>\n So what does this have to do with SimpleRisk and risk management?\u00a0 The classic formula for calculating risk is RISK = LIKELIHOOD x IMPACT and is the exact same formula used for calculating expected return and pot odds.\u00a0 You’re simply taking the likelihood of an event happening regardless of whether it is a positive or negative outcome and multiply it by the estimated dollar value of that outcome.\u00a0 Pretty simple.\u00a0 And that is what Powerball, Poker, and SimpleRisk have in common.<\/p>\n","protected":false},"excerpt":{"rendered":" With an estimated Powerball Jackpot of $1.5B, everybody is talking about it right now.\u00a0 I’ve got my tickets, but with a prize that big, I’m having an easier time listing the things that I can’t buy with the money, rather than what I can.\u00a0 That said, I keep coming back to a concept that statisticians […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[546],"tags":[644,643,642,640,641,638,549,639,551],"class_list":["post-647","post","type-post","status-publish","format-standard","hentry","category-risk-management","tag-expected-return","tag-impact","tag-likelihood","tag-poker","tag-pot-odds","tag-powerball","tag-risk","tag-risk-management","tag-simplerisk"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t