Lottery Arbitrage

Recently, the New York state lottery reached $65 million. The odds of winning on a one dollar play are about 1 in 22 million, so that seems like a very good bet!
Of course, it’s not as good as it seems, cause you have to factor in that the money is paid out over 20 years (or you can take only half the money at once). But say you take half the money up front – even then, $1 buys a 1 in 22 million shot at $32 million, which is still a positive expectation bet.
Of course, then you have to figure in taxes. But a good tax lawyer could get you down to 30% tax rate, so even after factoring in taxes, you’re looking at essentially an even money bet.
Even if you don’t win the jackpot, there are still lots of smaller prizes ranging from $1 to $500,000. You can expect to hit some of those prizes occasionally, too.
One last piece of data – 60% of the money spent on lottery tickets goes in to the lottery pool. So if you bought up tickets with all 22 million possible numbers, that would swell the prize pool even higher by 13.2 million.

So here’s my crazy idea for a business scheme – get investors to invest $22 million in your corporation. Wait until the lottery gets to $65 million (if you look at every state lottery, you’ll see this situation a couple times a year). Buy all 22 million possible tickets, swelling the jackpot to $78 million. You’re guaranteed to win the jackpot, plus you’ll win a lot of the smaller “match 4 out of 6 numbers” prizes too. This gives you a guaranteed jackpot of $39 million, plus a smaller return of an extra million or two. You can write off your $22 million cost as a business expense, so you’ll owe taxes only on the profit – leaving you about $20 million pre-tax profit, or about $14 million after tax profit. Guaranteed.

What is wrong with this analysis? Is the only flaw just the possibility that you might have to split the winnings with someone else who picked the right numbers?

With someone else or with several other someones. The more people play, the more risk of multiple jackpot winners. That’s a pretty severe risk to take.

I saw a TV show about 10 years ago (IIRC) of a bunch of folk that did this.

My memory of the show is vague so I can’t tell you much. I recall they had to forewarn the various 7-Elevens that they would be buying 100,000 tix at a time and the tix were somehow generated ahead of time.

I guess they won but I’m not sure if they ended up in the black.

MrFloppy I have the same recollection as you, and as I recall they didn’t win the biggie.
They did get a lot of the lower prizes but not enough to break-even.

The crux of the show was that even though they had theoretically covered all bases they lost out in the long run.

My question would be why not buy two tickets with the same number.
In the case of having to share the jackpot with another person, do you get two thirds of the total or just half.
For five numbers you could get £120K instead of £60K with an additional £1 stake.

I did the lottery when it first started but stopped a few months into it. I did win a £10 once so I wasn’t disgruntled. I just thought it too much of a nause.

I also remember the group that tried to buy all number combinations for the lottery. As I remember, the problem was buying all of the tickets. It’s difficult to do if you’re buying them at retail, so as I remember, they approached the lottery commission directly. I think this happened in New York State.

Wendigo, the UK National Lottery is vastly different to US lotteries with respect to payouts and tax implications.

Payouts in the UK Lottery are paid in a lump sum and are tax free.

Payouts in your average US ‘Mega’ lottery are paid out over 25-30 years or you can take a lump sum which is generally about 50% of the advertised payout.

In addition, you are taxed on any winnings so you end up with about 30-40% of the original advertised amount depending on the skills of your accountant.

This figures greatly into any calculations and thoughts of buying all the number combinations.

I remember reading a news story about this idea some time ago when it was a triple-rollover, but I don’t remember how it turned out.

It’s interesting though, to think about the logical implications of it though; consider:
-You’re going to buy every possible combination - you’re going to need the co-operation of the lottery organisation to pull that off.
-Having agreed to help you process a purchase of all possible tickets, it would be just as easy to agree to the notion that you had purchased every combination, without going to the expense of actually processing and printing them all
-This more or less amounts to an ahead-of-time assumption that, however the draw numbers turn out, you’re going to win a predetermined distribution of prizes and the calculation of these is trivial.
-Were it not for the possibility of other winners, the whole thing could be argued to be a paper exercise - I’m going to pay the lottery organisation X dollars, they’re going to pay me Y dollars in prize money. If Y is greater than X, why not save a lot of headaches and administration and just give me the money now?

If I did the math right there are something like 1.3 billion possible combinations. Don’t think thatbet is ever going to break even.

Nothing is wrong with the analysis, but you’re wrong to think you’re the first person to come up with this idea.

Here’s the best article I could find about a syndicate trying to corner the Virginia State Lottery in 1992.

You guys are taxed on your lottery wins?

We get the entire figure as a tax free lump sum. Then again, expected return is only 50%… what’s yours?

Lotteries are State run (although some there are some where a group of States get together and share a lottery.) In California and I think all other States too, you do not pay State tax but you do pay Federal tax.

As others have said, with a lottery that big, there is a good chance that you will have to split your jackpot winnings with another punter. Also, the logistics of buying every combination in a few days is daunting if not impossible.

this happened some years ago in Ireland. Like the uk the jackpot is paid in a lump sum and tax free. What made it worthwhile though wasnt just the jackpot. As part of a lottery special there a special prize of £100 for matching 4 out of 6 numbers. The usual prize for this was £10-20. ISTR that they had it calculated so that they would be in profit from these prizes alone even if they didnt win the jackpot. Naturally they won the jackpot as well. As other people have said the biggest problem was buying all the tickets. The Lottery people wouldnt co-operate with so they hired teams of people to go to shops all over ireland to buys tickets. It was executed like a military operation. Suprisingly the Lottery haven done a special prize like that since.

This old thread thrashed out some of the precedents and practicalities over three pages. As I pointed out therein, an historical example is the scheme whereby Voltaire led a syndicate to make a vast killing on a peculiar 18th century French government lottery.