Monday, January 30, 2006
"Lotteries are a tax on the stupid." Where I first heard this little pearl of wisdom is now lost to the annals of time, but every time I walk by a lottery kiosk I can't help thinking about it. After all, if you've taken any courses in math studying probabilities, you know that the odds of winning anything of significance are so low (e.g. 1 in 14 million for the 6/49 jackpot) that you're much better off putting all your money on insurance against being attacked by a shark (1 in 5 million), or everyone's favourite unit of comparison, being hit by lightening (1 in 4.8 million). Or perhaps you think a free lottery is worth your time, since you aren't losing any money. But with odds like 1 in 600 million for the Reader's Digest Sweepstakes - the same odds as conceiving identical quadruplets - your time might perhaps be better spent doing something else. As you can imagine with these kinds of odds, lotteries make a lot of money for governments. It's not surprising that the government does not want to share in this easy money and makes it illegal for anyone else to do so - with the exception of some charities of course, lest it appear too greedy. However, there is a type of lottery that has slipped through the cracks, and it's a big seller at electronics stores. In fact, it's the item with
the largest profi t margin by far at Future Shop and Best Buy. It's such a profi table item for the company (Best Buy owns Future Shop) that they try to get you to buy one with almost every purchase. What am I talking about? The Extended Warranty, of course. It's almost pure profi t for them. For example, if you buy a Canon PowerShot SD300 camera from Future Shop selling for $299.99, they also offer you a "Product Service Plan" ranging from $39.99 (for a two-year plan) to $69.99 (for a four year plan). Since it already comes with a one-year warranty, what this means is that if your camera breaks between one to four years from when you bought it, you win a free one! But would you pay $39.99 for a lottery ticket that had a lousy $299.99 camera as a grand prize? Even worse, would you buy a lottery ticket that cost $69.99 (plus tax!) to win a four-year-old camera? Well, for some strange reason, people do.
Think about the odds of actually "winning" this extended warranty lottery. You are betting that there is some sort of manufacturing defect that does not show up for a whole year. Sure, it can happen, but if there is a flaw, chances are that you'll notice it the fi rst day you use it. Don't forget, the extended warranty doesn't cover you if you drop your camera, or get sand in it, or get it stolen - just that it was made wrong in some way. After a month, or even a year of use, you're very likely to have noticed such a fl aw and that's covered by the manufacturer's warranty already included in the price of the camera.
Also, if you bought the camera with a CIBC Visa or a similar payment method, you also get another year of warranty free from them. Why does Visa give you such a "generous" perk? Because it doesn't cost them much to provide it, since very few gadgets have defects that show up after one year, but before two years. So, for $80.48 ($69.99+tax) you are betting that Future Shop will still be in business in four years, that you will have not lost your receipt for four years, that you still care about this camera in four years, that you have not broken it in four years, that you have not lost it in four years, and that it will break between one and four years from now. If you are that lucky, you will have won a $299.99 camera. Congratulations - But think of how many lottery tickets you could have bought for that money.