Will Someone Arbitrage The Powerball Lottery?

The estimated value of tonight’s Powerball Lottery currently stands at $1.5 Billion if the winner takes a 20 year payout.  A lump sum would generate an estimated $930 Million.  That exceeds the cost of buying every single ticket.

There are 295 million combinations and each game costs $2.   Therefore, if someone wanted to guarantee they would be a winner, the cost would be $590 Million.  That means if such a person was the sole winner, their profit would be $340 Million, a gross return of 58%.

But wait, it gets better.  50% of ticket sales go toward the pool.  So if an arbitrageur purchased all the tickets, the payout pool would actually rise to almost $1.8 billion and the lump sum payout would rise to about $1.123 Billion.  So in essence even if there were two winners the arbitrageur would receive over $561 Million making the loss only $29 Million or 5%.  And that single winner ticket would actually be worth a profit of $533 Million or 90%.

The biggest risk as I see it for the arbitrageur would be a second or even third arbitrageur buying a guaranteed win.  Even the logistics while difficult without the cooperation of the lottery authority, could likely be done for a relatively small cost.  You would need a computer programmer who could print out the proper game tickets, an army of people to stand on lines to buy the tickets, people to supervise them and an army of Brinks trucks to move the cash around and collect the tickets.  Certainly a daunting task but I would imagine not more costly than a million or two – small in relation to the investment.

I have no idea if it’s even legal to do this.  There could be rules that prohibit the purchase of tickets by legal entities as opposed to individuals or put a limit on the number of tickets one can buy.  However, in the absence of any prohibitions, I wouldn’t be surprised if a hedge fund somewhere takes a run at this.

The Bottom Line:  Hey You Never Know.

–Michael Ross, CFP®

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