Monday, March 5, 2018

It Pays to Read the Fine Print

Inc. Magazine brings the story of a couple from Michigan who read the rules from the Michigan lottery and realized that the way it was structured created a situation where a $1 ticket was going to be worth more than $1 statistically.  It still required "work" on their parts, to manage the huge number of tickets they bought, but over nine years it almost grossed them $27 million.
Meet Marge and Jerry Selbee, owners of a "party store" in Evart, Michigan that sold cigarettes, liquor, and lottery tickets. After watching thousands of customers, Jerry figured out how to hack the odds in a certain type of lottery: called Winfall in Michigan, and later Cash WinFall in Massachusetts.
We all know that the chances of winning the lottery are less than getting hit by lightning; around 1 in 20 million (depending on the numbers you choose from).  Furthermore, the way they're structured, it's typically not a good investment to be guaranteed to win.  In Florida, for instance, the lotto is based on getting 6 numbers right out of 53. That means there are about 23 million combinations, so to ensure you'd get a winner, you'd have to buy all 23 million of them at $1 a piece.  Most lotto jackpots are under half of that, but when it goes above that, it would be profitable to spend $23M on tickets - as long as you're the only winner, which is never a sure thing.  A lottery is just not a smart investment.

What they discovered was that the structure of one particular game was different from others.  It was possible to get more than you spent predictably.

Here, Inc links to Highline by the Huffington Post, but it's a long (10,000 word) article and Newser's Kate Seamons writes an excellent summary for  Their story starts with a pamphlet they got from the Michigan lottery at their store.
[T]hat pamphlet, ... advertised a new state lottery game called Winfall. Players paid $1 a ticket and picked six numbers 1 to 49.

Those who got all six correct won a jackpot of at least $2 million, but the "roll-down" structure provided a loophole, Jerry realized.

If the jackpot exceeded $5 million, a roll-down was triggered, something that happened about every six weeks: On the next drawing, if no one guessed all six numbers right, the jackpot "rolled down" to winners who had two, three, four, or five of the numbers right.

And Jerry realized that on those occasions, the odds were in your favor, in that a $1 ticket was worth more than $1. And so he started buying tickets, and lots of them, for those roll-down jackpots, ultimately creating GS Investment Strategies LLC, which allowed 25 friends and family members to pool money to fund ticket buys as large as $720,000.
The work part was that Jerry had to physically go to stores and spend hours buying tickets, one at a time.  He didn't tell Marge, who was more risk-averse, for a couple of weeks while he ran trials.  After two weeks, during which he made $6,300 after buying $3,400 worth of tickets--and then $15,700 after buying $8,000 worth of tickets, he brought the idea to his wife.
Then, Michigan closed down the game they were playing, and they focused on Massachusetts, where the stakes were higher. This also required a 12-hour drive each way to play--standing in convenience stores, for days at a time.

The Selbees took on investors, and then faced another challenge: a group of students from MIT who had also figured out the odds, formed an organization, attracted investors, and started making millions.
Like big bettors at Las Vegas or a horse race, their actions started to affect each other.  Ultimately, instead, it was the Boston Globe that ended up shutting down their tidy little "pension plan".
There was nothing illegal about what the Selbees or the MIT group were doing, but there was a perception that they were juicing the odds in their favor--and away from the "little guy" player, who might picking up a couple of lottery tickets on the way home from work.

It didn't matter, as the Selbees would later argue, that their out-of-state money was pumping millions of dollars into the Massachusetts lottery's coffers--and was ultimately distributed to the state's cities, towns, and schools.

It just didn't look right.
The state of Massachusetts did just what you'd expect a state to do when they realized that the Selbees and the MIT group had discovered a flaw in their rules.  Nothing.  At least at first, they did nothing to change the rules of the lottery that enabled this little side business.  Eventually, though, the Massachusetts Lottery shut down the game. And the Selbees made their final trip back to Michigan, after their 55th week of playing.

Predictably, the Selbees were vilified in the media despite having done nothing against any rule or law.  Inc. reports that between the two states' lotteries they grossed $27 Million and netted $7.75 M so they paid confiscatory taxes on their winnings (71.3%).  These days, they're back home in Michigan and I'm pretty sure they're facing fewer retirement financial worries than most (all) of us.  As Jerry said,
"If you figured it out and you could do this, would you do it?" Jerry Selbee said in the Huffington Post article, "I'm just asking. Would you?"
Hell, yeah. 

EDIT 2116 EST 030518:  The typo monster inserted one after I posted.  I swear.


  1. No. I am 75, grew up dirt poor and as a kid, 8 maybe 9 years old, we would play penny poker. I lost every time. Can't bluff well, nervous playing my own money. I haven't gambled since. Every penny, every dollar I own is mine and not to be gambled. So my lifelong losses to gambling is probably a dollar, maybe two, but I learned my lesson very young.

    My childhood friend who is 76 would win at poker. He could bluff, he could play his last penny, he could lose and not care. He still plays poker, he still wins but over all these years he has nothing. Lives in a basement one room apartment and still gambles or misspends his money. IMHO you either are a gambler or you are not.

    1. If you're mathematically guaranteed to make a profit, how is that gambling?

      It doesn't say what the return was, and I haven't tried to do the math, but the point was that the structure of the game guaranteed they would get back more than they spent.

  2. When I was a kid in the 40's and 50's my parents would play the numbers. I honestly don't know if this is still done but a quick explanation for those who don't know. The "number" was the last four digits in the "take" from the local race track and it was published in the paper everyday. But because the number was dollars and cents statistically 1 & 0 came up more often. My parents played "101" or "0101" regularly and would win often. The payout was lower for these two numbers because the Mafia knew they came up more than any other numbers did.

  3. Couple bought $19.1 million in tickets and collected $26.85 million from those tickets, losing in only 3 of 55 plays. At no time did they have $27 million on hand. They made $7.75 million which be the maximum retained earnings if no dividends were paid and the losing plays did not occur near the end.