How to win the lottery
Arbitrage and Incentives
This week’s video is about how to guarantee a win in the lottery. The rest of the post refers to it, so check it out before reading—
$20 Million on the Sidewalk? The Wild Economics of Lottery Arbitrage
I was inspired by Matt Levine’s column, which was based on reporting in the Houston Chronicle. What floored me was the sheer audacity of the group involved. It seems they literally just called the Texas Lottery Commission and asked if what they were doing was okay. And, incredibly, the Commission said yes.
Before you get mad at the Commission, their position is understandable, they likely want to sell as many tickets as possible. So it’s actually in their interest to let someone buy 26 million tickets. I guess they figured no one would notice that someone had guaranteed themselves a win, and the Commission would look good because of the record-breaking sales.
Additional Notes
The Wall Street Journal published an in-depth article after we had already written and recorded our video. The names in their story differ from those in the Houston Chronicle, so now I’m wondering—maybe “Ade Repcenko” is a made-up name? I mean, it always did sound invented.
After reading the WSJ story, the only thing I know for sure is these lottery riggers seem kind of awesome: nicknames like “The Joker” and “Ade Repcenko,” easy money, dodging Australian tax authorities, running a quirky museum in Tasmania. My favorite part is the mathematician who got involved with them in college because the gamblers knew how to talk to girls—and all he knew how to do was math.
Hey, I was a math major in college who couldn’t talk to girls. Why didn’t I fall in with these guys?
A Lottery ETF?
Subsequently, a Substack post from No Dumb Ideas proposed an ETF that does exactly what this group did: pool money and buy lottery tickets when the odds tilt in your favor.
Doesn’t seem like it would work… but as our video suggests, maybe it would work once? Either way, this NoDumbIdeas fella seems like fun.
The Real Experiment
The end of the video is real: I left a twenty-dollar bill out in public, and three people walked by without picking it up. Honestly, I wouldn’t have picked it up either. Not because I’m an economist—just because, on a college campus, if I see a twenty on the ground, I assume it’s part of some TikTok prank I want no part of.
What’s Going On in Michigan?
I really wanted to make fun of Michigan in this video for their ten-cent bottle redemption. They spend millions enforcing the law just to make sure no out-of-state cans get redeemed. To me, there’s an easy fix: just align your redemption rate with other states—or let people redeem them anyway. Isn’t the whole point to help the environment?
But before I made the joke, I wanted to be fair. So I spent hours researching this (yes, for one measly joke that got cut—dedicated to the Econ Nerd game), and here are the cliff notes:
Redemption works like this: you pay an extra 10¢ when you buy a beverage, and you get it back when you return the can.
The higher the deposit, the more people are incentivized to return cans. You could imagine a world with a $100 deposit— yeah, you’d get those cans back.
Since Michigan pays more, they have higher redemption rates: >80% versus ~50% in other states.
So Michigan is proud of its redemption rate. It’s a point of environmental pride, and no politician wants to be on the wrong side of that.
But… there are arbitrage issues.
Say someone brings me a can in California. I give them 5¢. Then I take it to Michigan and get 10¢. That 5¢ profit is a problem, because California paid for the deposit, but Michigan is refunding it.
To fight this, Michigan spends around $1 million annually on enforcement.
Seems easier to just drop the deposit to 5¢ like everyone else and pocket the savings, right?
But! Michigan keeps the 10¢ on cans that people don’t redeem. If they drop to 5¢, they’ll lose that revenue…
Right?
Wrong.
If the deposit is lower, fewer people redeem their cans. So we get a quantity effect and a price effect. Yes, they collect less per can (5¢ vs. 10¢), but if more people skip redeeming, the total unclaimed amount could go up.
For example:
At 10¢, if 1 out of 10 people don’t redeem → 10¢ × 1 = 10¢ revenue per 10 cans
At 5¢, if 5 out of 10 don’t redeem → 5¢ × 5 = 25¢ revenue per 10 cans
The rates above are roughly in line with the actual rates it seems. So Michigan could make more money by cutting the redemption rate.
Of course, the goal of the program is to promote recycling, not maximize state revenue—but it’s an interesting tradeoff.
Anyway! As you can see, it’s not a cut-and-dry issue. So I cut the part where I make fun of Michigan.
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