Confounded Interest

piggybank.jpgHere in Texas, lottery fever is at an all-time high, with jackpots over $100 million for both the basic Lotto and the Megabucks drawings. And as usual, the hopefuls flock in droves to lottery retailers and ticket sales run into the tens of thousands per minute statewide(and beyond). Some refer to the lottery as a tax on the math-impaired, yet its siren call manages to lure the poor as well as the rich to take on odds greater than being struck by lightning or hit in the head by an object falling from space. Some rationalize their participation because their Lotto bucks go to the state’s educational fund, which is a valid point since the state has been able to raise $11.4 billion since Lotto began here in 1992. I don’t knock anyone for playing as math was not one of my better subjects, thus I qualify to be among the heathen who drop a buck and participate in this dream of instant riches.

A recent editorial in the Houston Chronicle was yet another attempt to reform us poor math-deficient sinners who drop our well-earned bucks on the miracle of six-number paper slips. The article’s usual counter-defense scenario showed how an 18-year-old could earn a million dollars by investing those bucks instead into an interest-earning account, and through the magic of compound interest indeed have a million dollars by the time they were 68. On one hand we have the chance, although slimmer than a gnat’s mustache, of having that million dollars overnight OR investing and depending on “confounded” interest to get our million in, oh, say 50 years. Gee, which do you think the average person would prefer?

The growth of money via compounded interest used to be a magical thing, and one could typically double their money every 11 years. But in the recent past, and for all we know the tangible future, interest rates haven’t been what they used to be. The article stated the redirected Lotto bucks would grow to a million in an account earning 7% interest. Where can you invest a few bucks a week and get a 7% return? At current rates, if they hold, it’s more likely you’d see that million when you’re 108, not 68. With interest rates so pitiful and cost-of-living rising, it’s no surprise that millions play those impossible odds in hopes of instant wealth.

The lesson here is obviously about playing it safe, and working your money in some tangible vehicle rather than gambling. There’s philosophically no difference between putting a dollar on a Lotto ticket than rolling the bones in a crap game out behind the drugstore (except the odds on winning at dice are significantly greater). Gambling isn’t limited to money, though. We make choices in life all the time, calculating the risk for both sides and basing our decision on what we know about the situation. But these instances are also gambling to a small degree, without the moral implications but still dealing with odds of success. And if we make the right choice, then we’ve compounded our success for the next time. But if we make the wrong choice, we’re confounded with having to repeat steps to recover or worse, we continue making wrong choices wind up lost with a life resembling Bill Murray’s in Groundhog Day.