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O'Reilly Is a Masterful Lottery Player

question 58

Essay

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lump sum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why?
a. O'Reilly's after tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million.
b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.


Definitions:

Type A Personality

The ‘coronary-prone’ personality – a behavioural correlate of heart disease characterized by striving to achieve, time urgency, competitiveness, and hostility.

Aggression

Actions aimed at causing physical or mental damage to another person.

Frustration-Aggression Hypothesis

A psychological theory proposing that aggression is often a result of frustration caused by blocked goals.

Excitation-Transfer Model

The expression of aggression is a function of learnt behaviour, some excitation from another source, and the person’s interpretation of the arousal state.

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