August 3, 2012

MIT researcher and undergrads figured out a way to win the lottery and — over 7 years — spent $40 million to win $48 million.

Daily Mail reports:
Officials at the Massachusetts state lottery knew one of their games had essentially been taken over by the group of highly-intelligent gamblers but did nothing because their syndicate generated $16million.

Their system became an almost full-time business as the sophisticated gamblers snapped up hundreds of thousands of lottery tickets at $2 each.

By 2005 they had essentially monopolised the game....

It is thought lottery officials found out about the loophole in 2010 - or maybe earlier - but did not act because it was bringing in so much money....
So much for the notion that the lottery is a "tax on stupidity"? Actually, it still was a tax on stupidity for everyone outside of this syndicate, and since it was draining money from the amount that would otherwise be distributed to the stupid people, the stupid people were being taxed at a higher rate than usual. And the lottery officials were negligent (in creating the loophole) and then knowing as they enjoyed getting the money that they raised taxing stupidity.

60 comments:

Expat(ish) said...

Uh, hmmm, there are books available telling you how to game the lottery - much like there are about how to increase your odds in Vegas. The famous example is card counting, but there are other areas.

But the lottery is, generally, a tax on people how can't do math. Doesn't make them stupid, just innumerate.

Obviously these guys are, literally, numerate. So, maybe the way to think is that they were working (noted in the story) the lottery, not playing it.

-XC

edutcher said...

Actually, the saying is it's a tax on people who are poor at math, but look at it this way, it's MA economics.

Seeing Red said...

They spent $40 mil? Oh, those poor people they could have helped! The elite 1% must be occupied.

leslyn said...

Good for them.

"Oh, those poor people they could have helped!"

Now they have 8 million more to do that.

cubanbob said...

For a supposedly brilliant and numerate bunch that doesn't speak well for them. 20% return over 5 years? Seriously they could have bought muni's during that period and have done as well or better with far less risk and not have paid federal taxes on the income.

it does show the MA lottery officials are buffoons since this scam was played before this occurred in other lotteries. Those states simply made it impossible to buy so many tickets in a few places.

Michael K said...

Munis may be ending their run as a safe investment. Glad I don't have Stockton munis.

sydney said...

Wasn't there a movie like this? I did a quick google search but couldn't find it. I remember it being about a bunch of gangsters who pool their resources to try to buy the majority of lottery tickets. Then they all try to cheat each other.

dreams said...

I haven't check but their return might have beat the stock market over the same time period, still not a very good return on their money.

Michael K said...

The old saying that state lotteries are a tax on stupid is still true. The people running the lottery forgot the rule that, in poker, if you haven't figured out the mark by the second hand, you are it.

t-man said...

There is probably some disclosure form that the MA Lottery folks put out that describes the means of allocating winnings, and odds of winning, that was made fraudulent by the officials' knowledge that the MIT crowd was gaming the system.

dreams said...

SPY returned about 16% so they did beat the stock market.

Michael K said...

"I remember it being about a bunch of gangsters who pool their resources to try to buy the majority of lottery tickets."

A group of employees of Tri city Hospital in Vista, CA pooled their money about ten years ago and won the state lottery. It worked out to about $20,000 each. Can't find a link. It was about ten years ago.

1e89eb18-2fd8-11e1-9bcc-000bcdcb8a73 said...

dreams said...
SPY returned about 16% so they did beat the stock market.



Essentially risk free, too.

rhhardin said...

I have long favored making food stamps legal for buying lottery tickets.

It's a return of taxpayer dollars.

exhelodrvr1 said...

I hope they realize that they didn't win this themselves.

rhhardin said...

The syndicate doesn't work consistently, since another syndicate will split the winnings with some chance, making your payoff less than your cost by half.

So, more or less, just the right number of syndicates play.

rhhardin said...

The cost of a syndicate to the random player is making the payoff half what the random player imagined.

But he wasn't going to win anyway.

The Drill SGT said...

I'd go for a class action lawsuit :)

against the Gaming Board, arguing that they had knowledge that this was going on, knew who it was, made no attempt to stop it, AND falsely advertised the odds of winning to the Public that were off by a factor of 2.

Thus defrauding my class of millions.

Revenant said...

I second cubanbob's opinion. It is cute that they beat the system, but the ROI stinks.

AndyN said...

What rate are lottery winnings taxed at? I don't care enough to look it up, but it seems it should be the same rate as income. The articles I'm reading say they "won" $48 million over 7 years, which at least seems to imply that's everything the state paid out to them. Does anybody know tax law well enough to make a good guess at how much of that $8 million profit our young braniacs get to keep?

Donald said...

First, this is not a case where 40 million dollars grew to 48 over seven years. The bankroll that they started out with was a lot less than that. The "40 million invested" was mostly rehashing the same money. More likely they started with about 2 million and wound up with ten.

Second thing--I am confused by "Officials were simply guilty of failing to manage the game and enforcing the rules." Does this mean that they failed both to manage the game and enforce the rules? Or does it mean that they failed to manage the game and that they DID enforce the rules, but that enforcement of the (poorly thought out) rules was a bad idea, something they are "guilty" of (not in a legal sense, but in the sense that continuing the same set of rules, once the rules were known to give an advantage to the syndicate, was a moral failure)?

Matthias said...

For everyone saying that they got a bad ROI, I really doubt that they started with $40 Million. All it says is that they bought $40 Million in tickets. But if I spend $1 Million in tickets to make $2 Million, and then I put down $2 Million to make $4 Million, my lifetime ROI is 400%, not 33%, which is what you would come up with if you said that I "spent $3 Million to make $4 Million."

What seems most likely to me is that they started with a much smaller amount (a few hundred thou?) and then kept re-plowing the proceeds to ultimately make a profit of $48 Million. Which is a very high ROI indeed.

Am I looking at this wrong?

furious_a said...

State-sanctioned gambling is an excellent way to fund public education!

The Drill SGT said...

Revenant said...
I second cubanbob's opinion. It is cute that they beat the system, but the ROI stinks.


Not withstanding AndyN's reasonable question about taxes,


You and Cuban might feel differently if it were phrased:

"Parlaying an initial investment of $10 grand into $47 million in final winnings, the group made total bets amounting to $40 million."

without knowing the capital inputs , thus Return on Capital, your ROI analysis is flawed IMHO.

PS: I know no additional facts other than what was presented.

Paul said...

"tax on stupidity"?

It is given voluntarily! So it ain't no tax.

Rip off? Yes

Tax? no.

MSG said...

In 1728,Voltaire and some friends got rich taking advantage of a similar flaw in a French lottery.

dreams said...

"But if I spend $1 Million in tickets to make $2 Million, and then I put down $2 Million to make $4 Million, my lifetime ROI is 400%, not 33%, which is what you would come up with if you said that I "spent $3 Million to make $4 Million."

Your return would be 300% not 400% because $1 million of the $4 was money you started with not a part of your profit.

Rabel said...

"it does show the MA lottery officials are buffoons since this scam was played before this occurred in other lotteries. Those states simply made it impossible to buy so many tickets in a few places."

Maybe buffoons, maybe co-conspirators.

Seems like the buyers crossed a line if they organized to deliberately force the game into the "roll-over" mode. Can't find a rule in Mass against manipulation, so they might be in the clear.

In Vegas, several large men with shaved heads would have asked to have a word.

Conserve Liberty said...

For a supposedly brilliant and numerate bunch that doesn't speak well for them. 20% return over 5 years? Seriously they could have bought muni's during that period and have done as well or better with far less risk and not have paid federal taxes on the income.

The $40,000,000 is the sum of all the lottery tickets purchased over the 7 years, not a single investment made at the beginning of the period and held to the end of the period. Therefore return on an annuity calculation (internal rate of return) is not an appropriate measure in this case.

Given the amount of time each dollar was invested, return of the the $8,000,000 on the AVERAGE investment over time (the actual float) was significantly higher than 4.72% annualized. We can never know the actual return without true information, but it may be significantly above 30%.

dreams said...

"Munis may be ending their run as a safe investment. Glad I don't have Stockton munis."


I can remember in the early eighties when inflation and interest rates were so high XOM which was just Exxon at the time had a dividend yield of 12%, of course, also at that time money market funds were yielding 15%. I sure wish I had bought Exxon, reinvested the dividends and held it all those years.

BYondPolitics said...

20% return over 8 years? Not so good.

BYondPolitics said...

20% return over 7 years? Not so good.

BYondPolitics said...

20% return over 7 years? Not so good. Still, the state officials should be prosecuted.

William said...

Has anyone factored in the amount of labor it takes to check 40 million dollars worth of lottery tickets and then cash them in. This sounds like a tedious, time consuming job. Nietzsche remarked that if you game the system long enough, the system starts gaming you.

Geoff Matthews said...

How much value was generated by this lottery?

NotquiteunBuckley said...

One of my sore spots--one, mind you--is the anti-lottori amongst we, the people, who happen to live in an area, a country, so great, that even without skills or talents or unbridled evil we can be significant, by the lottery.

Those dreams don't count, according to the anti-lottori.

So, please precisely tell what dreams count and why, from the position of the dreaming.

I had thought that dreaming taking place to have been infinite, in America, hence my unwillingness to deny dreams in others which cost $2 a pop that they pay for, presumably.

NotquiteunBuckley said...

I just woke up from a dream of clarity.

Like every lotto purchase I've made.

Thank Lotto for the lesson.

Chip Ahoy said...

Here's how to play the slots. You must be psychic. You stand there in front of the machine and relax. Put your hand on the handle and take a moment to become one with the machine. Visualize a row of fruit. A happy row a fruit. All the same thing. All limes, all oranges, all apples, whatever is on the machine. And then, as a machine part, you are one with it, mentally and spiritually open up all your energy pathways, not that bowel pathway keep that one shut, but open all the energy pathways and allow the energy to circulate. Feel the energy circulating through the machine in front of you, visualize the gears spinning around and the gears connected to the handle and your arm which is part of the handle and allow your body to interact with your opened up mind and spirit to pull the handle either gently or hard determined by all that circulating energy itself to produce the happy row of fruit from the spinning gears dink dink dink dink. kaching. You get some kind of return. You do that over and over an dover an dover an dover. It takes a very long time. A LONG time. Do you think all this meditationary stuff happens instantly? No. It doesn't. You have to stand there and take your time. It's hardly worth the nickels they gave you for having breakfast at the place. It's not a good idea. Sorry I brought it up. Gambling is bad.

Joe said...

After doing some crude calculations using Excel, the capital required to do this is tremendous. So where did they get the money?

The Godfather said...

What am I missing? The lottery officials knew this was going on, but they did nothing because the syndicate was generating so much money in lottery ticket sales. But what was going on was a program in which the members of the syndicate were getting more dollars out than what they were paying in. So if the lottery officials only cared about the pay-in and not the pay-out, who's stupid here?

Or, could it have something to do with the fact that the lottery is run by the government?

jimbino said...

Damn. The stupid will now be advised to take out insurance, the other well-known tax on stupidity.

Title insurance pays out some 2% of premium receipts. Car insurance some 50%. NFIP flood insurance some 65% and, if you can believe it, Obamacare some 80%.

I consider anything that does not pay out more than 100% a stupid investment, especially when, like Obamacare, it charges me, a single childfree male, a premium to support all those hypochondriac, breeding females who will benefit from my Obamacare premiums for years after I'm dead.

Robert said...

Something is missing here. They spend 40 million to make eight million, but the lottery made 16 million? How is that possible?

Freeman Hunt said...

Voting for state lotteries that fund scholarships = a socially acceptable way for the middle class say, "Screw the poor," and con them out of the little money they have.

From Inwood said...

CJ Roberts says that, for purposes of stupidity, the lottery is not a tax but it is a penalty. QED, as such, the lottery does not discriminate against the stupid class tho it does penalize them.

Whatever. These philosophical discussions are too taxing for me.

From Inwood said...

Robert

This is an old Abbott & Costello routine.

Costello: I spend $40MM & take home $48MM & the Lottery fund gets $16MM?

Abbott: Right.

From Inwood said...

Robert:

Or it's the old garmento [cedarford alert!)joke about how it's OK to sell below cost because you know you'll make a profit on volume.

From Inwood said...

Is it true that Mitt made money in this syndicate & that this is why he won't release his tax returns?

That's what someone told me.

Geoff Matthews said...

If I remember correctly, the payout from the lottery would increase in a cyclical way. Once it reached a certain payout level, the average payout per ticket purchased was higher than the cost of a ticket (taking into account every possible permutation).
If you kept track of this, it paid off to buy every possible permutation, because you'd be guaranteed an average payoff that was greater than the cost of a ticket (using mean probabilities and all that).
But Godfather makes a very good point. A private entity would have noticed this and acted to stop it (changing the methods for calculating the payout, for instance). But a government entity? What incentive do they have to perform well?

The Drill SGT said...

Robert said...
Something is missing here. They spend 40 million to make eight million, but the lottery made 16 million? How is that possible?


I'll try in simple terms

- they did this over years, thus I think
- they started with a small amount of cash, say 10k
- they bought tickets at certain times, likely when there wasn't publicity that brought in lots of bettors and multiple winners

in TOTAL, over the whole period, they won 48 million and lost 40 million, but that was in many many events over 2200 days

they certainly did not ever have more than say 100k in play. law of large numbers at work, this time against the less sophisticated by a group rather than by the lottery board.

rhhardin said...

I don't know the rules or procedure, but I assumed that the lottery financially cares only that the return is in the house favor if somebody wins a single, un-rolled over game.

It doesn't matter that nobody wins and it rolls over. They just pretend that somebody won each game, and on the side roll over the unclaimed prize.

So the single prize from each game is in fact paid out, just somewhat delayed when it rolls over.

It doesn't matter what the return or odds are for a rolled-over game, just for the single game.

Rolled-over players, on the other hand, have to contend with odds of multiple winners when the odds begin to favor the players, so there's never a clear case where the odds are in your favor. Favoring odds attract more players.

Rabel said...

Details here:
Gaming the Lottery

Crimso said...

"Now they have 8 million more to do that."

Wonder how many poor people contributed to that 8 million. It's not like the government is covering the cost of the prizes. And even if they were, where does the government get its money? (That's a rhetorical question, BTW)

Penny said...

Take away the lottery, and you take away a lot of hopes and dreams.

Take away Obama, and you take away a lot of hopes and dreams.

Penny said...

More change in our pockets though!

How bad can that be, really?

cubanbob said...

The Drill SGT said...
Revenant said...
I second cubanbob's opinion. It is cute that they beat the system, but the ROI stinks.


Not withstanding AndyN's reasonable question about taxes,


You and Cuban might feel differently if it were phrased:

"Parlaying an initial investment of $10 grand into $47 million in final winnings, the group made total bets amounting to $40 million."

without knowing the capital inputs , thus Return on Capital, your ROI analysis is flawed IMHO.

PS: I know no additional facts other than what was presented.

8/3/12 2:15 PM

What everyone forgets is that in order to win you have to play every possible combination (and play be the state's rules) to win a round so you have to go in big plus there is no guarantee that your syndicate will be the only winner. Then depending on the state's rules you may only collect the full face value if you take the winnings over a number of years. If you want to cash out immediately then the state usually pays only half which is why the state still makes money no matter what. You take the payout in full that states still keeps half. You take the payout over the time period the state has invested the money in an annuity. The state always wins.

So the syndicate took a huge chance of not being the only winner and at best they probably took the money in one lump sum with a big discount. The taxes are at taxed at ordinary tax rates.

wef said...

Parasites use taxpayer $$$$ to buy lottos to enrich MIT parasites.

ha ha

_Jim said...

Read all about it; the Inspector General interviewed the principles involved and got the whole thing 'down for the record':

http://www.mass.gov/ig/publications/reports-and-recommendations/2012/lottery-cash-winfall-letter-july-2012.pdf

_Jim

Freeman Hunt said...

What sort of people become lottery officials? One might ask what sort of people sign on to a business that makes almost all its money by tricking poor people into buying worthless paper? Then their not fixing the problem is expected.

Fernandinande said...

"...but did not act because it was bringing in so much money..."

They were actually losing money. Amazing stupidity.

K Cousins said...
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