Premium Bonds: Are they worth it? Discussion Area

Reestit_Mutton

stevemcol wrote:

Reestit Munton
Martin's assessment might not stand up to pure mathematical analysis but is pretty much bang on as far as real world is concerned.
If you're looking at pre bonds as a source of garanteed or even probable interest, of course you should dismiss the high end prizes. An individual will not win either of the top two prizes. It is pragmatic then to take into account only probable wins to calculate probable interest.

I don't disagree with the broad thrust of your argument. Afterall, sometimes an engineering approach to problem solving is required. However, in this case, an engineering solution is unnecessary as the problem is mathematically tractable.

Also, I really do have to draw the line at statistical abuse. Your emphasised categorical statement is just as wrong as Martin's treatment of the data. "very unlikely to" would have been a much more acceptable phrase for you to use.

The real problem here is that Martin's reputation is built upon financial nouse. For this reason alone he has a moral responsibility to be very careful with any mathematical analysis that he uses as people will be inclined to blindly accept it as truth. At the end of the day, if he can't justify his methods then he shouldn't use them...or, at the very least, he should clearly acknowledge their limitations in the same way that engineers acknowledge the limits of their assumptions.

Reestit Mutton

System

November 1st, and will islandman's £4 worth bought in June 1961 come up today ?

halloweenqueen_2

http://www.nsandi.com/products/pb/winnerlist.jsp

Big winners list for november - I'm not on it!!

whambamboo

Reestit_Mutton wrote:

I don't disagree with the broad thrust of your argument. Afterall, sometimes an engineering approach to problem solving is required. However, in this case, an engineering solution is unnecessary as the problem is mathematically tractable.

Also, I really do have to draw the line at statistical abuse. Your emphasised categorical statement is just as wrong as Martin's treatment of the data. "very unlikely to" would have been a much more acceptable phrase for you to use.

You are of course right, and the analysis is indeed invalid. As I showed earlier in this thread, even with compounding, the distribution of prizes makes no difference to the expected return whatsoever.

The correct term for what is going on is variance.

The expected return is the expected return, but there is higher variance (i.e non-zero cf. a bank account). You can quantify and describe this variance (e.g., by listing every 5th percentile for the return, or by giving the standard deviation (which is likely to be misleading as the distribution will not be normal until the sample size is impractically large, due to the jackpot spike on the right-hand side of the curve))), but it is absolutely wrong and inappropriate to exclude say the top percentile and use it to make a fake expected return. This is like excluding the best 10 days from the stock market every year (which if I recall correctly would completely wipe out the return), or investing in a stock market guaranteed equity bond that has a capped return & no dividends - something which is rightly criticised in the strongest terms on this site.

Although the mode is interesting as a number, the terms in which the numbers are expressed are misleading & inappropriate: there is no such thing as an expected return excluding the highest prizes for some arbitrary reason - there is a mean and a mode, but to express it as a % pseudo-return is plain wrong.

ReportInvestor

Ananova - ERNIE is 50

More bonds have been sold in the last 5 years of PBs than in the first 45.

Pablo1971

Sadly I think you've missed the point in this one Martin. Your analysis is technically correct, of couse, but the flutter element coupled with the security of never losing your stake is the whole point of premium bonds. However, IMO the following points are worth shouting about...

1. The interest rate is abysmal - why is it so poor?
It should be more competative.

2. The distribution could be better. Most people don't need £1m
£50,000 to £250,000 are life changing amounts for most
people and even £5,000 or £10,000 are nice windfalls.
I'd like to see more prizes in the medium and lower upper value
amounts making [slightly] higher odds of winning and possibly scrap
the £1m prize altogether. Of course I realise that this is only
opinion.

Lorian

So something is so unlikely to happen, we'll say it doesn't.....

DNA wrote:

It is known that there is an infinite number of worlds, simply because there is an infinite amount of space for them to be in. However, not every one of them is inhabited. Therefore, there must be a finite number of inhabited worlds. Any finite number divided by infinity is as near to nothing as makes no odds, so the average population of all the planets in the universe can be said to be zero. From this it follows that the population of the universe is also zero, and that any people you may meet from time to time are merely the product of a deranged imagination.

Gorgeous_George

Pablo1971 wrote:

Sadly I think you've missed the point in this one Martin. Your analysis is technically correct, of couse, but the flutter element coupled with the security of never losing your stake is the whole point of premium bonds. However, IMO the following points are worth shouting about...

1. The interest rate is abysmal - why is it so poor?
It should be more competative.

2. The distribution could be better. Most people don't need £1m
£50,000 to £250,000 are life changing amounts for most
people and even £5,000 or £10,000 are nice windfalls.
I'd like to see more prizes in the medium and lower upper value
amounts making [slightly] higher odds of winning and possibly scrap
the £1m prize altogether. Of course I realise that this is only
opinion.

Better still, make it so that there are as many prizes as there are bonds and make all prizes worth 0.2625 pence. Then, we will be able to consider PBs as an investment (paying 3.15%) as opposed to a gamble. Everybody will earn 3.15% interest (excluding compounding) tax free.

And, YOU DO LOSE YOUR STAKE.




GG

ReportInvestor

HI Pablo and welcome to the site,

Pablo1971 wrote:

1. The interest rate is abysmal - why is it so poor?

It's hard to argue with this. Are there extra admin costs, as is sometimes given as a reason? I very much doubt it compared to running accounts.

Banks and building societies have to issue people with annual statements. Many write to customers to notify them of (regular) interest rate changes.

2. The distribution could be better. Most people don't need £1m
£50,000 to £250,000 are life changing amounts for most
people and even £5,000 or £10,000 are nice windfalls.
I'd like to see more prizes in the medium and lower upper value
amounts making [slightly] higher odds of winning and possibly scrap
the £1m prize altogether. Of course I realise that this is only
opinion.

Interesting. On the occasion of the 50th anniversary, maybe NSI should write to PB holders asking them to vote for two or three different pay out options?

PBs do seem to be "the people's choice". Why not democratise it?

Gorgeous_George

halloweenqueen wrote:

http://www.nsandi.com/products/pb/winnerlist.jsp

Big winners list for november - I'm not on it!!

Two lucky bond holders won 111 times their holding. One in London Borough of Richmond-on-Thames and one in Liverpool. The first won £1million and the second won £10K.

The earliest winning bond was bought in 1968 and was the only winner from that decade. The 70's saw 3 winning bonds; 80's saw 5 winning bonds; 90's saw 52 winning bonds and the 00's saw 231 winning bonds (high value prizes only) with 117 having been sold in 2005/06.

The high value winners collectively hold 5,961,484 bonds and these shared prizes (again, only high value prizes as published) worth £5,940,000.

Neither of the £1million winners held the maximum.

Those holding the maximum of £30,000 worth of bonds hold £2,820,000 between them and won £1,515,000. The others hold bonds worth £3,141,484 and won £4,425,000. So, this month, it was better not to hold the maximum.

Now, if we exclude the £1million winners, the fortunes remain the same. Maximum bond holders still hold £2,820,000 and win £1,515,000; the others hold £3,112,474 and win £2,425,000.

Therefore, I conclude, that it is better to NOT hold the maximum number of PBs.

Just call me statto.

I'll get me coat.



GG