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How to Apply Pareto Analysis to Lotto

Pareto analysis is a risk analysis technique that gets its name from an Italian economist with the surname ̶0;Pareto.̶1; Essentially, this technique uses a principle that states that 80 percent of the results come from 20 percent of the work. In risk analysis, this principle is extended to the idea of managing decisions related to uncertainty. In short, Pareto analysis allows statisticians to take only the most important information into account when making a decision. You can apply Pareto analysis to the lotto, a risky yet potentially profitable game.

Instructions

- 1
  List the risks involved in playing the lotto. Confirm that you list all possible risks you can think of and that the risks are all controllable to some extent by your personal decisions. There are many possible risks you can list, including cost (the price of the ticket), lost profit (the price of sharing the lotto with others) and danger (the possibility of getting hurt on the way to purchase the ticket or after winning the lotto). There may be subjective risks involved, but many of the risks are likely to be objective.
- 2
  Organize these risks in order of importance. Start with the most important risk, writing it on the top of the list. Underneath, write the second important risk. Do this for all risks until the list is complete.
- 3
  Cross out the bottom 80 percent of the list. You will dispose with 80 percent of the risks because according to the Pareto principle, the top 20 percent of the risks are the most pertinent. If your list does not come out to a perfect 20/80 split (e.g. you have 11 items instead of 10), delete more items than less (i.e. delete 9 items from a list of 11 risks).
- 4
  Evaluate these risks and make a decision for each one. For example, if after deleting the bottom 80 percent of your list, you find that only the items ̶0;loss of income̶1; and ̶0;loss of profit̶1; were left, further investigate the decisions you can make to minimize these risks. Then make a decision. If you want to minimize the risk of loss of income, calculate the probability of winning the lotto, multiply that probability by the jackpot value and then compare that number to the price of the ticket; if the price of the ticket is lower than that value, you will lose income in the long run and should not play the lotto.

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