An Elderly Mathematician Hacked the Lottery for $26M
entrepreneurshandbook.co
entrepreneurshandbook.co
If you are interested in how exactly he did it, here is a more detailed description:
That's not quite the optimum solution - what if you accidentally played the same numbers a million times, instead of a million different sets of numbers? So you should make sure you spread out your plays. However, I believe spreading them randomly is "good enough": the interesting maths only improves your edge a tiny amount.
Its only anecdotal evidence, but this would support your idea.
I used to work for a mom & pop company. The owner was really wealthy. He would only play once the pot got to an insane amount (I think it was over $5 or $10 million) and then on his way into the office, would stop at 5-8 places, buying anywhere from $1-$3K in tickets a shot.
I still vividly remember huge stacks of lottery tickets sitting on his huge desk in his office.
He never did win the big pots, but did win a $1K or $2k amounts by matching a few of the numbers. But very clearly, he spent WAY more then he ever won.
Which, in a recreational context, one could argue has more potential upside than a lot of other recreational activities (at least it's on the table, unlike other activities), and a pretty high baseline thrill as well.
Whereas other forms of recreation (IMO) give you more in return, such as increased dexterity, increased knowledge, strengthened human relationships, an interesting story to ponder and discuss, etc.
I'm not saying people who gamble or use drugs are bad, I'm just saying the value of a given recreational activity can be measured along more axes than "dopamine yield"
For you, maybe increased dexterity or knowledge is good, but for another person, that's downright boring.
One other way to "value" thrill is whether it is legal or illegal, whether it damages other people or just a single individual.
In terms of pleasure derived, you can't really say "this is useless entertainment" vs "this entertainment makes you smarter too so it's better"
Buying a bond that has a 10x return with a 50% default rate is still a great investment.
If only 50% of tickets are defaulting, there is something very very wrong with that lottery. This is more like a bond that pays a 100x return but has a 99.9% default rate.
From my own research, the sets of tickets that give you the best chances still have negative expectation of reward.
[0]: https://en.wikipedia.org/wiki/Lottery_mathematics#Minimum_nu...
https://highline.huffingtonpost.com/articles/en/lotto-winner...
Previous discussion on the good article: https://news.ycombinator.com/item?id=16494280
Honestly, the currently linked article seems to me like low-effort blogspam.
State lotteries love to go on how their proceeds are used for education. But I bet 14 full rides to college on $8MM is a greater impact on education than what the state achieves with the same amount.
Anyway it’s kind of ironic you are comparing the state’s education spending to a tax avoidance scheme.
The point of the comment, which I'm not sure why it was being downvoted, is why something might sound newsworthy (14 college funds?) when it really has a simple, logical explanation if you're sophisticated with money. And in the same breath, in applause of a guy performing a tax optimization, the original poster shits on the state - did it create this tax loophole? Do you think the people running government want college to be expensive?
Rich people, really everyone with heritable wealth, love the 529 plan. If you understood that it is used to create multi-purpose, heritable investment accounts tax-free in vast excess of the actual cost of tuition - that anyone who would have a hard time paying Harvard's tuition goes for free anyway - you would detect some insincerity in "14 college funds" too!
And maybe consider that this 529 plan remains the status quo, this total tax dodge, because of people who have this romanticized picture of it being used to pay expensive college tuitions. We're talking about a family so sophisticated that it's probably going to change legal guardians on those very same children in order to benefit from free tuition anyway.
It's a great story. We certainly want our brainiacs spending resources "hacking" some shitty institution like the lottery. On the other hand, you think he doesn't take beyond his measure from the government too?
We used the 529 plan for our daughter, who will go to college in a few years. Let's say 5 for the purpose of the math. At this year's price her 4 years of college tuition will cost her ~ $48k. This total expected to go up around $10k every year before she gets to college (around $2k annual tuition rise, over 5 years).
So if we paid her tuition when she went in five years, we would pay $20k, $22k, $24k, $26k, for a total of $92k. Instead we pay $50k now, and are guaranteed to not have to pay any additional tuition costs, for a savings of $42k. The tax deferment might be another $8k (spitballing).
Which means the using a 529 plan now you can send two kids to college in 5 years for the price of sending one to college in 5 years and paying for it then.
Yes, there are risks.
* They may want to go to a private school, or out of state. The money isn't lost, but you don't get the guarantee either. You just get the money applied to the tuition.
* Tuition prices may come down and stay down. They haven't yet, and it seems unlikely without major upset. They might come down over the next year, but I suspect they'll go back up.
* Universities may become free, or become extinct in their current form. With any forward-looking investment there is a risk of a true disruption that completely changes the landscape. This would be such a huge change that it's not likely to completely happen within the 9 years until she would graduate, if it happens at all.
The only irony here is the fact that the grandparents spend a higher portion of their proceeds on education than the state (probably, every state is different), and still had plenty of money left over for vacations and other fun stuff.
The biggest selling point of state lotteries is that the money is is used "for education." Califoria is coming under fire for not giving enough of the lottery money to schools, and they only require 1/3rd of proceeds to go to education, and allow about 1/6th of the proceeds to be used for "administration costs" within the schools.
In other words, these people utilizes more of their winnings for education than the state probably did, despite using the majority of the money for non-education-related expenses. Even though, most lotteries are sold as financing for education. That's what irony looks like.
$0 has been spent on education so far. $2m has been put into an investment account whose realized gains are tax free. You can bet people withdraw with the 10% penalty all the time to spend that money on whatever they want, not college.
The state also runs its own investment accounts, like this individual does, and spends it on many totally worthy concerns, like paying pensions that are used by beneficiaries to pay for housing, food and indeed, sometimes education, so maybe that's the more appropriate comparison.
> they could just as easily gifted their grandkids that much money, tax free (federally, at least)
I don't think that's true, and your information appears to be the result of doing Google searches on SEO'd tax and accounting law partnership pages.
It seems like there a lot of misunderstandings anyway about how this stuff works. Can they reduce the taxes they would otherwise pay on the lotto income? Of course, creating 14 529 plans (as opposed to say, 1, or 0) is an important part of that strategy. Then there are so called experts working in finance chiming in, which if I could point to anyone being a complete waste of money for baby boomers in the last 20 years, it’s CFAs collecting 1.0-1.5% AUM every year on top of mutual fund fees that all underperformed low cost indices. The kind of assholes who, in the absence of any normative measure, have finally settled on justifying their high fees as “not answering the phone when you want to panic sell.”
It’s infuriating, honestly, the lack of any sophistication whatsoever and the trust put into total leeches like CFAs. And here we are, getting lost in the tax details, from people who would balk at paying a retainer for an ongoing professional opinion instead of a management fee - when those opinions could save them literally millions over the lifetime of a windfall like this - and wind up on SEO’d advice pages googling stuff themselves instead.
A bunch of temporary embarrassed billionaires Googling, shitting on how the state spends money, voting in tax cuts for people much richer than them. I don’t have expertise either, I’m not a lawyer or an accountant ,but consider paying one the pathetically small fee it would cost to get an answer to these questions that make sense for you and your situation.
The gains are tax-free iff spent on qualified expenses.
Non-qualified distributions from a 529 pay ordinary income taxes on the realized gains on top of the 10% penalty. As a tax avoidance scheme, this one is pretty terrible.
The rest of the dispute aside, 529s really are used for education.
It's absolutely true. You can give up to $15k a year to anyone. If you gift more than that amount to certain people, you have to file Form 709 with the IRS. Income taxes are due on the amounts after total lifetime gifts to a person exceed the lifetime exclusion limit, which is currently $11,700,000. If married, these numbers are doubled, as each spouse may gift individually.
But even if none of this applied, you can find a list of exclusions right on the IRS website, which states:
Transfers Not Subject to the Gift Tax
Four types of transfers are not subject to the gift tax. These are:
Transfers to political organizations,
Transfers to certain exempt organizations,
***Payments that qualify for the educational exclusion, and***
Payments that qualify for the medical exclusion.
Also, I'm pretty left leaning. My shitting on the state for mismanagement of (and outright lies on the use of) lottery funds is because I want them to be held accountable and live up to their promise.
When I was in college, I did some pharmaceutical testing with a local company. We had three colleges in the area so it was perfect for recruiting healthy males between the ages of 18-35.
They came out with some advertising showing they paid college kids more money in six months than the state did in tuition support at all three colleges combined. It was enough to get the state's attention and got them involved in how they both could be doing more for the state's college system. I know at one point the company was donating a LOT of money to all three colleges Pharma school and hiring a lot of their students. It provided them a nice pipeline of talent.
EDIT: The company was out of North Dakota. All the stuff we tested was already FDA approved. Most of the studies were companies looking to get less expensive generic forms of those drugs into the market. Here's some of the tests I was in:
- Naproxen
- Sudafed (it was a nasal variety for decongestion)
- Diclofenac
- Zinc Acetate
- Doxycycline
You weren’t the only one.
> But at this point, Jerry had won more than $26 million dollars from the state lottery. After deducting for expenses, they took in more than $8 million in profit.
There are many lotteries that have times with an expected positive payout. The key is that the payout can't be shared. Most of the big lotteries have times like this but the chances of having to share it ensure the payout is never positive.
I was reminded of the story of Mohan Srivastava[1], an MIT/Stanford-trained statistician, who found a flaw in the Ontario Lottery's "Tic-Tac-Toe" instant game. There's a great quote from Mr. Srivastava re: his morality and exploiting the flaw he found:
"People often assume that I must be some extremely moral person because I didn't take advantage of the lottery," he says. "I can assure you that that's not the case. I'd simply done the math and concluded that beating the game wasn't worth my time."
Also why do you find gambling unethical? Do you also find poker unethical? What about trading stocks?
Maybe because gambling companies whole purpose in life is to rip people off, so it's fair play to do that back to them? :)
I don’t see why this is a mistake. Every lotto should do it, but I can see why they don’t.
It all starts to go wrong when the secret gets out; ordinary lottery players might avoid the game because they see it as rigged, so the revenue goes down. At this point, the lottery organisers have to do something.
Effectively, players during weeks without rolldowns are subsidizing excess prizes for weeks with the rolldown rule in play. This is probably a feature you don't want in the game, but it's not too different from games where when the jackpot is particularly high that the EV of a ticket can exceed its price.
The state's error was being too slow with "Roll Downs."
10 years, $26M revenue, $8M profit. $800K/year; I guess taxes were counted in the $18M expenses. Nice "side-gig" to running a convenience store!
[edit: 10 years, not !0 years.]
At least where I am, vendors and their family are basically prohibited from playing/winning after they were found to be winning way too often.
What was happening is they would get to know which players don’t check how much they’ve won and declare you’ve won $100 when you really won $1000. Or worse.
You can also clock how long it takes to sell tickets at gas stations and calculate a theoretical maximum because you can get all of the selling locations.
The exciting technique was determining when your buying could trigger a rolldown, possibly without it being previously announced.
This is probably likely, but wrong in general. If the tickets cost $1 and the total prize money is composed from e.g. 50% of the ticket prices plus a fixed amount of leftover prize money, when enough tickets are bought for the rolldown round, the leftover prize money isn't enough to cover for the 50% of the new tickets that doesn't go in the pot.
Example: $2m leftover money in the pot, 5 million tickets bought for $1 each. EV = $2m + 50% of $5m = $0.9 per ticket.
Now, if you buy enough tickets to guarantee e.g. 4 correct numbers and know for a fact that due to a rolldown the minimum payout is going to be high enough to cover the cost of that (at least with a high probability), then you're fine. I'd assume that's what the couple in the story did.
I don't think the headline "Old man used math to win $26M" would've fared worse.
https://highline.huffingtonpost.com/articles/en/lotto-winner...
https://www.theatlantic.com/business/archive/2016/02/how-mit...
An average person will NOT do it.
Is it really a hack? I believe he increased his probability of winning chances