Sunday, February 6, 2011

Lottery Zero Sum Game?

Hat tip to Adithya for this link about the Toronto statistician who figured out how to beat the scratch off lottery tickets.

The most interesting part of this discussion is the money laundering aspect.  I love the notion that if, in fact, much scratch-off lottery ticket sales reflect money laundering, then it could be the case that lottery tickets do not actually raise tax revenue!  (The article has more detail, but imagine if the lottery were a nearly break even exercise because you could crack the system.  Then, a paper trail of substantial lottery winnings combined with bulk cash purchases of get the idea...) 

The second probably obvious question: What other nearly break even cash bets exist in the world that could be money laundering mechanisms?  Here are a few:

  • Casinos.  I guess this should be obvious, but it's yet another reason organized crime should like casinos: That rate at which you lose money on roulette probably beats the discount you take for other forms of money laundering.  Might demand for gambling services be a good proxy for the level of illegal activity in a given region or country?
  • Racetracks.  I wonder if anyone has ever examined closely bets involving very close odds, or if the studies of arbitrage opportunities in off track betting have attempted to identify money laundering in betting on favorites?
  • There's a growing market for casinos that base themselves on FX trading.  (Again, in my regime of full disclosure, I looked at investing in one of these.)  Imagine video games where the underlying activity is small moves in foreign exchange.  These machines are typically legal in jurisdictions where gambling is not.  They also benefit from cash based trading.  Might help explain why the group I spoke to wanted to set up "parlors" all over eastern Europe.

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