Massachusetts Institute of Technology
If anything involving numbers involves students from MIT, aka the Massachusetts Institute
of Technology, you know those guys are going to figure it out.
There was the famous blackjack team that ran from late 1979 through 1989.
That was well documented and made into a movie.
However, not many people know about this MIT team that cracked a lottery.
Just how did a team of former MIT students figure how to beat the lottery hundreds of
times?
Research Topic
In 2005, James Harvey was at the end of his time at MIT where he was finishing up his
math degree.
He needed a project for his final semester in school.
He stumbled on lotteries during his research for a topic.
Harvey began analyzing well-known lottery games, such as the Powerball and MegaMillions.
Those lotteries were big lotteries with big prizes, which is something that attracted
all sorts of players.
But he soon became intrigued by a lottery called Cash WinFall.
This was a new game that was introduced in Massachusetts in 2004 and it was only in Massachusetts,
limiting the player pool.
Cash WinFall
The rules were simple for this lottery.
Players could choose six numbers for each ticket.
And each ticket costs just two dollars.
At the beginning of the lottery, if a ticket matched all six numbers in the draw, the ticket
holder won a jackpot of AT LEAST half a million dollars.
And, if a ticket matched some, but not all the numbers, a ticket would win a little bit
of money.
The lottery was designed so that for every dollar played, 60 cents would be paid out
in prizes.
This is of course, a losing proposition in the long run.
The rest of the 40 cents of that dollar would just be spent on whatever the government deemed
was needed in the local community, just as usual.
Cash WinFall seemed to be just like all the other lottery games that were available.
If no one won in a particular week, that prize would just rollover to be combined with next
week’s prize, something that plenty of other lotteries had as well.
Out of Sight, Out of Mind
However the problem for lotteries with rollovers is that there are times when no one wins for
a very long time.
Lottery officials worry that if no one appears for a long time in the local newspaper or
local TV station with a giant check, people stop playing because they don’t see people
winning.
And because of that, they stop playing.
The Massachusetts Lottery faced precisely that challenge in 2003.
Its Mass Millions game went without a winner for an entire year, and ticket sales fell.
Lottery officials didn’t want the same thing to happen with Cash WinFall.
Roll-Down
So lottery officials decided on a big change.
Instead of rolling over the prize money when no one won, they instead would roll DOWN the
prize money.
Basically, this means that there would be a GUARANTEED winner once the prize grew to
a certain amount.
And this rule change was the key to everything.
If the prize rose to $2 million dollars without a winner, that triggered a roll-down.
The jackpot would be split among the players who had matched three, four, or five numbers!
Before each drawing, Cash WinFall would publish its estimate for the jackpot, which was based
on the ticket sales from previous draws.
When the estimated jackpot reached $2 million dollars, players knew that SOMEONE had to
win.
Lottery players intuitively realized that the odds of winning money were far better
in a roll-down week than at any other time.
This meant that ticket sales always surged, something that was exactly what lottery officials
wanted.
Expected Value
It didn’t take long for Harvey to calculate that the expected value to play Cash WinFall
was better than any other lotteries.
This just means that it was actually profitable to play the lottery, although it doesn’t
mean wins are guaranteed.
When a roll-down happened, there was at least a 15% return for every dollar played.
The big risk here was the 1.4% chance that the jackpot would be won, and that means no
one else would get paid out.
For Harvey, his only problem was capital.
That and how long his group could play the game.
Random Strategies Investments, LLC
In February of 2005, Harvey formed a lottery group with some of his fellow MIT students.
Roughly 50 people chipped in for the first batch of tickets.
They raised a thousand bucks total for that round.
Although they didn’t win the big one, Harvey’s calculation proved to be correct.
The MIT Group tripled their money the first week they played in the Cash WinFall lottery!
And that’s how Harvey’s life completely changed.
Over the next few years, playing the lottery became a full-time job for him.
Cash WinFall had become THE most profitable lottery in the US.
By 2010, he and fellow team member Yuran Lu officially made it into an incorporated business.
They named it Random Strategies Investments, LLC.
This was named after the smallest dorm at MIT, a dorm that Harvey lived in.
Structural Change?
During the summer of 2010, the Cash WinFall jackpot again approached the roll-down limit.
After a prize of $1.59 million went unclaimed on August 12th, the lottery estimated that
the jackpot for the next round would be around $1.68 million.
The roll-down was at least two, maybe three weeks away.
By the end of the month, the jackpot would be almost guaranteed.
But for some reason, the roll-down came the very next week instead!
There had been a huge increase in ticket sales that week, triggering the roll-down.
Lottery officials were just as surprised as the players.
AND, the fact that a betting group would corner the market was something that they had anticipated.
Still, they had never sold that many tickets in a week before!
When Cash WinFall was first introduced, lottery officials researched the possibility of someone
deliberately triggering a roll-down by buying up a big number of tickets.
They calculated that a player who used stores’ automated lottery machines would be able to
churn out about 100 tickets with random numbers per minute.
If a jackpot had less than $1.7 million dollars, that player would need to buy over 500,000
tickets to push it above the $2 million dollar limit.
Because this would take well over 83 hours.
And that’s if they did it over 83 hours NON-stop, something that was impossible.
The lottery didn’t think anyone would be able to do it in time at 1.7 million dollars.
But they didn’t properly take into consideration the lengths certain betting groups would go
to, specifically, the MIT lottery team!
The Rules
When Harvey first started doing lottery research in 2005, he tried to get a copy of the guidelines
for the official rules of the game.
He was looking for rules that outlined just exactly how prize money was distributed.
A whopping 3 years later in 2008, the lottery finally sent him what he had requested.
The information was what pushed him and the group into overdrive, because they had the
exact calculation, instead of just the models they had come up with!
The group figured out that their time to strike was when the jackpot failed to top $1.6 million
dollars.
That was the magic number where they figured that they can realistically start their push
of buying tickets.
Methodical Planning
The unexpected surge Lottery officials saw that second week of August in 2010 was a methodically
planned out operation by Harvey’s group!
They had been planning all year for it.
In fact, they had been planning the prior year too.
The MIT Lottery group had to fill out around 700,000 tickets.
And here’s the crazy part.
They did it ALL BY HAND.
700,000 tickets by hand!
However, their efforts paid off.
It’s estimated that the group made around $750,000 thousand dollars that week.
Unfortunately for Harvey and his partners, the profits didn’t continue for that much
longer, at least in that particular lottery.
Within a year, The Boston Globe’s Andrea Estes had discovered that Cash WinFall could
have been gamed by sophisticated mathematicians.
She went ahead and wrote about it in the paper.
That news report prompted Gregory Sullivan, Massachusetts’s Inspector General, to do
research into the lottery in 2011.
Sullivan concluded that the actions of the MIT Lottery group and other betting syndicates
were entirely legal and that no one’s odds of having a winning ticket were affected by
high-volume betting.
But the game was gradually phased out anyways.
Zero Sum
Even if Cash WinFall hadn’t been phased out, the game wouldn’t have remained profitable
because of the publicity it received.
That was simply because of the fact that after the news report came out, people started forming
more and more betting groups.
As more people bought tickets in roll-down weeks, prizes were split into smaller and
smaller chunks.
That meant that the ROI shrunk since it was a zero sum game.
At the beginning, during normal weeks, picking five out of six numbers correctly meant a
$4,000 win.
During a roll down week, that prize was anywhere from $20,000 to $40,000 dollars.
The amount depended on how many winning tickets were cashed.
Fewer winning tickets translates to larger payouts.
For example, in Cash WinFall’s first year, the prize for picking five numbers correctly
once exceeded $100,000 dollars!
The MIT betting team anticipated the competitive environment and made their move to corner
the market earlier to obtain an edge over other teams.
The MIT group also had a better understanding of the game better than any of their competitors.
They knew the exact payoffs and probabilities because of the information from the lottery
officials themselves.
However, the MIT group also knew that their approach would mean that large betting groups
would catch on and start buying tickets as well.
They knew that it would become a race to the bottom!
Surprisingly, the MIT Team wasn’t the leading winners in the Cash WinFall game in 2010.
They were second in amount of money won.
The group that made the most money is called GS Investment Strategies, which was run by
Gerald and Marjorie Selbee.
They made almost a million dollars just in that game that year.
Jerry and Marge have actually roughly made 26 million dollars in profit from playing
the lottery!
Sheer Manpower
Then there was just the matter of logistics.
The MIT Team had handwritten all the tickets and it took them roughly A YEAR to do it.
And just because there was a machine at a store, there was the matter of convincing
store clerks to print out hundreds of tickets at a time.
There were plenty of stores that would refuse to serve teams altogether.
However, on the other hand, there were some store owners that made it a priority to sell
to teams.
That’s because they got a commission equal to 5 percent of the lottery sales.
And even if someone was able to get on a machine, there were other problems.
The ticket machines would jam in humid weather.
And if the machine was low on ink?
That slowed down the printer a lot.
Then there are all the other random issues that theoretically can pop up in buying lots
of lottery tickets.
Such as getting robbed!
There was also the question of how to store and organize all the tickets they bought.
Harvey had to keep millions of losing tickets in boxes in order to show audits if it happened.
AND, it was a giant headache to find winning tickets!
Opportunity Cost
Betting groups aren’t new.
They’ve long used the tactic of brute force attacks to beat lotteries.
The only real obstacle is buying enough tickets.
It’s more a question of manpower than mathematics, and this reduces the exclusivity of the methods.
However, Harvey knew this coming in, and that’s why they took the time to meticulously outthink
and out-maneuver their competition.
Even with their edge though, Harvey knew that it couldn’t last forever.
He realized at some point, the sheer legwork to win this particular lottery couldn’t
outweigh the money he could have made doing something else.
To this day, there are still gambling groups that operate around the world that have managed
to repeatedly and legally, beat whatever games they play into a profit.
From 2004 to 2011, professional gambling groups spent about $40 million dollars on Cash WinFall
to win roughly $48 million dollars.
That $40 million dollars in extra tickets worked out to around $16 million extra dollars
for the Lottery fund.
Who were the big losers?
The average player of course.
Here’s what’s next!
Massachusetts Institute of Technology
If anything involving numbers involves students from MIT, aka the Massachusetts Institute
of Technology, you know those guys are going to figure it out.
There was the famous blackjack team that ran from late 1979 through 1989.
That was well documented and made into a movie.
However, not many people know about this MIT team that cracked a lottery.
Just how did a team of former MIT students figure how to beat the lottery hundreds of
times?
Research Topic
In 2005, James Harvey was at the end of his time at MIT where he was finishing up his
math degree.
He needed a project for his final semester in school.
He stumbled on lotteries during his research for a topic.
Harvey began analyzing well-known lottery games, such as the Powerball and MegaMillions.
Those lotteries were big lotteries with big prizes, which is something that attracted
all sorts of players.
But he soon became intrigued by a lottery called Cash WinFall.
This was a new game that was introduced in Massachusetts in 2004 and it was only in Massachusetts,
limiting the player pool.
Cash WinFall
The rules were simple for this lottery.
Players could choose six numbers for each ticket.
And each ticket costs just two dollars.
At the beginning of the lottery, if a ticket matched all six numbers in the draw, the ticket
holder won a jackpot of AT LEAST half a million dollars.
And, if a ticket matched some, but not all the numbers, a ticket would win a little bit
of money.
The lottery was designed so that for every dollar played, 60 cents would be paid out
in prizes.
This is of course, a losing proposition in the long run.
The rest of the 40 cents of that dollar would just be spent on whatever the government deemed
was needed in the local community, just as usual.
Cash WinFall seemed to be just like all the other lottery games that were available.
If no one won in a particular week, that prize would just rollover to be combined with next
week’s prize, something that plenty of other lotteries had as well.
Out of Sight, Out of Mind
However the problem for lotteries with rollovers is that there are times when no one wins for
a very long time.
Lottery officials worry that if no one appears for a long time in the local newspaper or
local TV station with a giant check, people stop playing because they don’t see people
winning.
And because of that, they stop playing.
The Massachusetts Lottery faced precisely that challenge in 2003.
Its Mass Millions game went without a winner for an entire year, and ticket sales fell.
Lottery officials didn’t want the same thing to happen with Cash WinFall.
Roll-Down
So lottery officials decided on a big change.
Instead of rolling over the prize money when no one won, they instead would roll DOWN the
prize money.
Basically, this means that there would be a GUARANTEED winner once the prize grew to
a certain amount.
And this rule change was the key to everything.
If the prize rose to $2 million dollars without a winner, that triggered a roll-down.
The jackpot would be split among the players who had matched three, four, or five numbers!
Before each drawing, Cash WinFall would publish its estimate for the jackpot, which was based
on the ticket sales from previous draws.
When the estimated jackpot reached $2 million dollars, players knew that SOMEONE had to
win.
Lottery players intuitively realized that the odds of winning money were far better
in a roll-down week than at any other time.
This meant that ticket sales always surged, something that was exactly what lottery officials
wanted.
Expected Value
It didn’t take long for Harvey to calculate that the expected value to play Cash WinFall
was better than any other lotteries.
This just means that it was actually profitable to play the lottery, although it doesn’t
mean wins are guaranteed.
When a roll-down happened, there was at least a 15% return for every dollar played.
The big risk here was the 1.4% chance that the jackpot would be won, and that means no
one else would get paid out.
For Harvey, his only problem was capital.
That and how long his group could play the game.
Random Strategies Investments, LLC
In February of 2005, Harvey formed a lottery group with some of his fellow MIT students.
Roughly 50 people chipped in for the first batch of tickets.
They raised a thousand bucks total for that round.
Although they didn’t win the big one, Harvey’s calculation proved to be correct.
The MIT Group tripled their money the first week they played in the Cash WinFall lottery!
And that’s how Harvey’s life completely changed.
Over the next few years, playing the lottery became a full-time job for him.
Cash WinFall had become THE most profitable lottery in the US.
By 2010, he and fellow team member Yuran Lu officially made it into an incorporated business.
They named it Random Strategies Investments, LLC.
This was named after the smallest dorm at MIT, a dorm that Harvey lived in.
Structural Change?
During the summer of 2010, the Cash WinFall jackpot again approached the roll-down limit.
After a prize of $1.59 million went unclaimed on August 12th, the lottery estimated that
the jackpot for the next round would be around $1.68 million.
The roll-down was at least two, maybe three weeks away.
By the end of the month, the jackpot would be almost guaranteed.
But for some reason, the roll-down came the very next week instead!
There had been a huge increase in ticket sales that week, triggering the roll-down.
Lottery officials were just as surprised as the players.
AND, the fact that a betting group would corner the market was something that they had anticipated.
Still, they had never sold that many tickets in a week before!
When Cash WinFall was first introduced, lottery officials researched the possibility of someone
deliberately triggering a roll-down by buying up a big number of tickets.
They calculated that a player who used stores’ automated lottery machines would be able to
churn out about 100 tickets with random numbers per minute.
If a jackpot had less than $1.7 million dollars, that player would need to buy over 500,000
tickets to push it above the $2 million dollar limit.
Because this would take well over 83 hours.
And that’s if they did it over 83 hours NON-stop, something that was impossible.
The lottery didn’t think anyone would be able to do it in time at 1.7 million dollars.
But they didn’t properly take into consideration the lengths certain betting groups would go
to, specifically, the MIT lottery team!
The Rules
When Harvey first started doing lottery research in 2005, he tried to get a copy of the guidelines
for the official rules of the game.
He was looking for rules that outlined just exactly how prize money was distributed.
A whopping 3 years later in 2008, the lottery finally sent him what he had requested.
The information was what pushed him and the group into overdrive, because they had the
exact calculation, instead of just the models they had come up with!
The group figured out that their time to strike was when the jackpot failed to top $1.6 million
dollars.
That was the magic number where they figured that they can realistically start their push
of buying tickets.
Methodical Planning
The unexpected surge Lottery officials saw that second week of August in 2010 was a methodically
planned out operation by Harvey’s group!
They had been planning all year for it.
In fact, they had been planning the prior year too.
The MIT Lottery group had to fill out around 700,000 tickets.
And here’s the crazy part.
They did it ALL BY HAND.
700,000 tickets by hand!
However, their efforts paid off.
It’s estimated that the group made around $750,000 thousand dollars that week.
Unfortunately for Harvey and his partners, the profits didn’t continue for that much
longer, at least in that particular lottery.
Within a year, The Boston Globe’s Andrea Estes had discovered that Cash WinFall could
have been gamed by sophisticated mathematicians.
She went ahead and wrote about it in the paper.
That news report prompted Gregory Sullivan, Massachusetts’s Inspector General, to do
research into the lottery in 2011.
Sullivan concluded that the actions of the MIT Lottery group and other betting syndicates
were entirely legal and that no one’s odds of having a winning ticket were affected by
high-volume betting.
But the game was gradually phased out anyways.
Zero Sum
Even if Cash WinFall hadn’t been phased out, the game wouldn’t have remained profitable
because of the publicity it received.
That was simply because of the fact that after the news report came out, people started forming
more and more betting groups.
As more people bought tickets in roll-down weeks, prizes were split into smaller and
smaller chunks.
That meant that the ROI shrunk since it was a zero sum game.
At the beginning, during normal weeks, picking five out of six numbers correctly meant a
$4,000 win.
During a roll down week, that prize was anywhere from $20,000 to $40,000 dollars.
The amount depended on how many winning tickets were cashed.
Fewer winning tickets translates to larger payouts.
For example, in Cash WinFall’s first year, the prize for picking five numbers correctly
once exceeded $100,000 dollars!
The MIT betting team anticipated the competitive environment and made their move to corner
the market earlier to obtain an edge over other teams.
The MIT group also had a better understanding of the game better than any of their competitors.
They knew the exact payoffs and probabilities because of the information from the lottery
officials themselves.
However, the MIT group also knew that their approach would mean that large betting groups
would catch on and start buying tickets as well.
They knew that it would become a race to the bottom!
Surprisingly, the MIT Team wasn’t the leading winners in the Cash WinFall game in 2010.
They were second in amount of money won.
The group that made the most money is called GS Investment Strategies, which was run by
Gerald and Marjorie Selbee.
They made almost a million dollars just in that game that year.
Jerry and Marge have actually roughly made 26 million dollars in profit from playing
the lottery!
Sheer Manpower
Then there was just the matter of logistics.
The MIT Team had handwritten all the tickets and it took them roughly A YEAR to do it.
And just because there was a machine at a store, there was the matter of convincing
store clerks to print out hundreds of tickets at a time.
There were plenty of stores that would refuse to serve teams altogether.
However, on the other hand, there were some store owners that made it a priority to sell
to teams.
That’s because they got a commission equal to 5 percent of the lottery sales.
And even if someone was able to get on a machine, there were other problems.
The ticket machines would jam in humid weather.
And if the machine was low on ink?
That slowed down the printer a lot.
Then there are all the other random issues that theoretically can pop up in buying lots
of lottery tickets.
Such as getting robbed!
There was also the question of how to store and organize all the tickets they bought.
Harvey had to keep millions of losing tickets in boxes in order to show audits if it happened.
AND, it was a giant headache to find winning tickets!
Opportunity Cost
Betting groups aren’t new.
They’ve long used the tactic of brute force attacks to beat lotteries.
The only real obstacle is buying enough tickets.
It’s more a question of manpower than mathematics, and this reduces the exclusivity of the methods.
However, Harvey knew this coming in, and that’s why they took the time to meticulously outthink
and out-maneuver their competition.
Even with their edge though, Harvey knew that it couldn’t last forever.
He realized at some point, the sheer legwork to win this particular lottery couldn’t
outweigh the money he could have made doing something else.
To this day, there are still gambling groups that operate around the world that have managed
to repeatedly and legally, beat whatever games they play into a profit.
From 2004 to 2011, professional gambling groups spent about $40 million dollars on Cash WinFall
to win roughly $48 million dollars.
That $40 million dollars in extra tickets worked out to around $16 million extra dollars
for the Lottery fund.
Who were the big losers?
The average player of course.
Here’s what’s next!