A Couple Who Made Millions Beating Lotteries

We all know that lotteries are a loser’s game that taxes the poor, but Jerry and Marge Selbee made millions of dollars playing lotteries in Michigan and Massachusetts. Jason Fagone tells their story in the entertaining article Jerry and Marge Go Large. I think Fagone and some of the players in this story let state authorities off the hook for badly-designed lotteries.

The key to how the Selbees made money is the “roll down” feature of the lotteries they played. When the top prize is large enough and nobody wins it, some lotteries roll down the money for this prize into lesser prizes. So, if nobody matches all 6 out of 6 numbers, those who match fewer numbers get bigger prizes.

The Selbees were able to predict when a roll down was likely to cause the lottery to pay out more than it took in. By buying tickets at these times they had an expectation of making money. So, they weren’t cheating. They were playing the lottery the way it was intended to be played. There was nothing special about the way they picked their numbers; they were just random picks. What set the Selbees apart from most other players was that they were selective about when they played, and they bought massive numbers of tickets.

After the story broke that the Selbees and other groups made millions this way, the Massachusetts inspector general conducted an investigation. “There was no evidence, wrote the inspector general, that the game had harmed anyone—not the small players, and not the taxpayers. … The large groups had bought some $40 million in tickets, $16 million of which was revenue for the state.”

This conclusion is based on bad accounting. On average, across all players, 40% of lottery ticket prices became revenue for the state. But, this is very different from saying the state made 40% on every ticket sale. In truth, regular players contributed more than 40%, and the savvy players took revenue away from the state.

Fagone paraphrased a Reuters article as saying “Cash WinFall [the lottery’s name] was possibly more fair than other lottery games, because it attracted rich players as well as poor ones. Instead of taxing only the poor, it taxed the rich too.” This is a ridiculous conclusion. How can we reasonably conclude that the lottery taxed those who played with an expectation of winning?

In reality, regular lottery players have reason to be upset. The state designed a lottery badly allowing some players to pocket millions of dollars contributed by the regular players. I don’t blame the clever players for making their money. Blame lies with the states that offered badly-designed lotteries.