Lottery arbitrage post-mortem

It’s not uncommon for lottery games to become +EV at some point in time when the jackpot is getting bigger and bigger, but it’s hard to make a profit: you still need to win the jackpot to realize your EV. The Massachusetts State Lottery’s Cash WinFall game on the other hand had an unique feature: when the jackpot reached a certain level and  wasn’t hit, the money was distributed to lower tier prize winners. The Inspector General released a report on the subject today, and Kid Dynamite posted some tidbits.

Lottery arbitrage is for example not for lazy people:

“While Mr. Selbee’s use of Quic Pics saved some time, he did not have shortcuts when it came to collecting his group’s winnings. Mr. Selbee said he and his wife sorted the tickets by hand into winners and losers. This process – visually inspecting approximately 60,000 paper betting slips, each with five panels of six-number bets printed on them – took days. Mr. Selbee said he and his wife would cull the winning tickets while still in Massachusetts and then drive the losing tickets back to Michigan where they would sort through the losing tickets again because they invariably missed some winners. He said he and his wife spent 10 hours per day for 10 days examining the losing tickets a second time.”

But it can be quite profitable:

The August 16, 2010 drawing was a one-of-a-kind event in the history of Cash WinFall when a single high-volume betting syndicate, the MIT group, took the Lottery, the other syndicates and everyone else by surprise. They single-handedly bought enough tickets to push the jackpot to $2 million, triggering a roll-down that no one else was expecting and that was never announced to bettors on the Lottery website. As a result, the MIT group virtually monopolized the winnings from this drawing.

[…]

Lottery records show that the MIT group claimed 18 of the 21 match-five $30,282 prizes, or $545,076. Of the 1,002 tickets sold that matched four of the numbers, the MIT group cashed in 868 of them, or $1,003,408. Because match-threes and match-twos can be redeemed at any Lottery agent, it’s impossible to say how many the MIT group had. Based on its winning percentages in the higher tiers, it’s likely that the MIT group had at least 15,000 match-three winners, each worth $37, as well as 105,000 match-twos, worth about $210,000 in future free bets. In total, on its $1.4 million wager, the MIT group made a $700,000 cash profit.

Competitive dynamics are also at work in the lottery arbitrage ‘industry’. Multiple betting groups started to buy tickets at a large scale, reducing the profit margin. The profit is coming from people buying tickets in earlier rounds when the jackpot does not hit the threshold and smart money doesn’t participate. When more people play the final round you get a smaller piece of the dumb-money-pie, and when the final round becomes too popular the opportunity could disappear completely.

Interesting story, and shows that you can find value in some unconventional places!

4 thoughts on “Lottery arbitrage post-mortem

  1. pietje

    I highly recommend that everybody reads the entire article. It is so awesome that it makes me want to start blogging again. The best part is probably that one group “accidentally” hit the jackpot while buying tickets for the rundown. That group won over $2M with a ridiculous ROI, while all their competitors lost a couple of 100K$. As a trader / poker player one has to appreciate that. All the grinders losing a shitload, you luckbox a gazillion and the fish doesn’t lose anything. One thing left to do: thrashtalk your competitors into leaving the game. Find out where they buy tickets, hire a guy with a megaphone that keeps shouting “loser!” whenever somebody starts buying a lot of tickets.

    Also awesome: the MIT frontrunning the rolldown. I quote: “That would require a minimum of 83 hours to buy 500,000 tickets and spend the $1 million needed to force a roll-down. The IT department concluded that that couldn’t be done.”.

    Also awesome: tax compliance being such a hassle that many people quit the game. Having so many boxes with lottery tickets that your roof almost collapses. Spending weeks manually checking hundreds of thousands of lottery tickets (TWICE!) This truly was an grinder’s game. I’m surprised the writer of this blog wasn’t involved.

    Also awesome: of course there is at least one Chinese guy involved in every betting syndicate.

    Reply
  2. pietje

    But the most shocking about the entire story is not mentioned anywhere in the report. I’m not sure I can classify it as “Also Awesome”. In his conclusion the Inspector General writes that the state earned $120 million with this particular lottery. We can estimate that betting syndicates made at least a couple of million as well. What he doesn’t tell us, but what we can conclude: the general public lost at least $125 million playing a lousy lottery. The payout ratio was 60% which means that people invested at least $300 million in lottery tickets over a couple of years.

    And this is only ONE of the several lotteries available in only ONE state of the USA. A state that has, according to Wikipedia, less than 7 million inhabitants. I will leave it to the reader to do some fun calculations.

    I’m not sure yet what to think about this. Level 1 reaction: it is pathetic. Level 2 reaction: it is one of the smartest and most efficient ways of raising taxes. Level 3 reaction: people who buy lottery tickets probably receive above average amounts of government benefits, and this is useless, wasteful circulation of money. Level 4 reaction: they would spend the money on stupid shit anyway, this is a genius way to prevent them from doing so. Level 5: ?

    What I do know: the betting syndicates made significant amounts of money. Their hourly wage was impressive. But it doesn’t look like a fun job. And the exceptional money is made in ORGANIZING a lottery. Building a casino. Opening a poker site. Or starting a brokerage firm.

    Reply
    1. Hielko

      The question is: did people get a positive utility from participating in the lotery? Something can be -EV, but it could still make sense to participate if the hope accociated with the possibility of winning the jackpot has a higher value than the money lost in the transaction. So maybe a lottery doesn’t waste massive amounts of money, but maybe it does deliver something that has real value?

      Reply

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