Retired mathematician who hacked the lottery

Puzzle lover
Gerald Selby has always loved riddles: where others saw only noise, he strove to find order and harmony. While working at Kellogg's Oatmeal Factory, he analyzed materials to increase shelf life. One day, while studying cereal from other companies, Jerry came across a strange sequence of characters on the back of a General Mills box. Instead of a date and a manufacturing factory, a mysterious code was printed there. Jerry decided to decipher it: taking several boxes of Kellogg's and General Mills breakfasts, he began to compare their moisture content, realizing that cereals with approximately the same moisture content should have close production dates. By making notes on paper, he identified some patterns. Soon he was able to decipher everything that made it possible to determine the place, date and time of manufacture. In a more aggressive line of business, “hacking” competitors' secrets could have been a huge benefit, but not in the production of oatmeal, so management was not enthusiastic about its discovery.

However, Jerry did not upset - he just liked to understand how the world and its individual parts work from the inside. As a child, he suffered from dyslexia, having difficulty reading homework, but after a standardized test in eighth grade, he found that he had the skills of a scientist. After graduating from high school, he married his classmate Marjorie, went through several jobs, and had six children, while continuing to study. He was educated at Kellogg Community College with a BA in Mathematics and Business and an MBA from Western Michigan University. All this time, he did not give his brain a break. To prevent his hobbies from interfering with family life, Jerry involved children in them. When he began to be interested in mushrooms, he took the children with him to the forest; falling in love with geology, he took them to look for fossils in the quarries. Finally Jerry realized that it was time to start working for himself, and decided to open a small store. The family moved to Ewart, Michigan.

The Corner Store where Jerry first became interested in the lottery
Mathematically verified store
Ewart - 1903 residents, three banks, one McDonald's, the only traffic light in the entire city. Selby chose this city for a reason - despite its provinciality, it was close to traffic flows, and the presence of nearby General Motors and Chrysler factories ensured the presence of buyers. Factory workers, lawyers and bankers, whom Jerry knew, if not by their names, then at least from the purchases they usually made, passed regularly through the store. In managing his business, he also found an interesting mathematical problem and sought to optimize the use of each square meter as much as possible. For example, he knew that cigarette makers paid shopkeepers of a certain area to display their products by selling them each pack at a discount. Taking advantage of this, the mathematician began to buy cigarettes in bulk and sell them to those stores that were not given discounts.

A year after buying the Corner Store, Jerry decided to install a lottery machine in the store, a small box that prints Michigan lottery tickets. This machine was the only one in Evart, it quickly gained popularity and things went well. Soon, the store began selling tickets for $ 300,000 annually, of which Selby had 20,000 left. The machine was so successful that the couple were able to build a small extension to the store and hired another worker to run the lottery. Thanks to the income, Selby was able to pay for the tuition of all six children who received their degrees.

And so it went on for more than fifteen years. Finally, in 2000, Jerry and Marge decided it was time to retire. Jerry sold the store and visited the new owners from time to time to see how things were going. One day, in 2003, he saw a brochure in the Corner Store advertising the new Winfall lottery. The ticket cost $ 1. The player chose six numbers from 1 to 49. If he managed to match all six numbers, then he received a jackpot of $ 2 million or more. If five, four, three or two numbers out of six are guessed, then the player will also win. However, Jerry was interested in a curious feature of the game, the so-called "overflow": if no one won the jackpot for a long time and it increased to 5 million, then this amount was "overflowed" down to the winners who guessed fewer numbers. The “overflow” occurred approximately every six weeks. The brochure gave the chances of guessing the combinations: Jerry saw that there was a 1/54 chance of picking up three numbers and winning $ 5, a 1/1500 chance of guessing four and winning $ 100. After doing the calculations in his head, he realized that the player who waited for the "overflow" was more likely to win than to lose if no one guessed all six numbers and won the jackpot in the "overflow" draw. In this case, the jackpot was distributed over smaller combinations of numbers, and the three correct numbers brought the winner not 5, but 50 dollars, and four - not 100, but 1000. Suddenly, the probability began to play on the side of ticket buyers! From the point of view of statistics, a ticket for 1 dollar at the time of the "overflow" had a higher value than the face value.

An idea arose in Jerry's head, but at first he had to hide his risky venture from Marge - she was always pragmatic and did not like adventures. Jerry decided to secretly model his first games on a piece of paper. He chose the numbers at the moment of the "overflow", waited for the drawing and calculated his winnings. In theory, he managed to make money.

The next time the Winfall jackpot hit $ 5 million and the state announced an overflow, Jerry went to the store 47 miles from Evart so that no one would ask him unnecessary questions. Walking over to the lottery machine, he spent $ 2,200 letting the computer pick the numbers. On the day of the draw, Jerry went through 2,200 tickets and circled all matches of two, three and four numbers (he did not have a match of five numbers). In total, his winnings amounted to $ 2,150 - slightly less than he spent on tickets. A less confident person in his system could stop there, but Jerry realized that he was simply unlucky. Probabilities are just probabilities, not guarantees. His mistake was that he risked too little amount. During the next spill-over, Jerry returned to the neighboring town and bought $ 3,400 worth of Winfall tickets. This time, so that Marge would not catch him, he checked the winnings right in the store, sorting through the tickets by hand. He managed to win $ 6,300 that day. Plucking up the courage, he bet 8,000 on the next overflow and won $ 15,700.

Jerry decided to share his secret with his wife, she agreed to further play. After all, who won’t be convinced by the 15 thousand won?
The task of buying large batches of tickets turned out to be a daunting task. Lottery terminals in stores could only print ribbons of 10 tickets at a time, that is, to bet $ 100,000 on Winfall, you had to wait near the machine while it prints 10,000 ribbons. We enter the purchase code. Press the button "Print". We are waiting at least a minute until 10 tickets appear. Enter the code for the next purchase. Click "Print". We are waiting again. Jerry and Marge knew every grocery store owner in town, so none of them bothers them when they come in in the morning and print tickets all day. The Selby family tied bundles of $ 5,000 tickets with rubber bands for money, and then in the silence of their living room collected them in piles in accordance with the winnings (zero, two, three, four and five matching numbers). After counting all the tickets, they counted them again so as not to miss anything. Gradually they practiced and it took a few moments to check each ticket: took it, looked it up, put it in a pile. Jerry and Marge tried to involve the children in sorting, but they could not keep up with them, the parents coped ten times faster.

The garage where Selby kept all non-winning tickets in case of a tax audit

In June 2003, Jerry created a corporation to manage his group of players, deliberately choosing the boring name GS Investment Strategies LLC for it. He began selling $ 500 shares in it, first to his children, then to friends and colleagues from Evart. Jerry's corporation gradually grew to 25 members, including a state police officer, a parole officer, a bank vice president, three lawyers, and even his personal accountant, Steve Wood.

Business was going well: by the spring of 2005, GS Investment Strategies LLC had participated in 12 Winfall “spillovers”, each time increasing the size of bets and winnings. At first, the profit was 40 thousand. Then 80. Then 160. Marge transferred her share to her bank deposit. Jerry bought a new pickup truck and began purchasing US Mint coins for inflation protection, trying to keep his family safe in the event of a possible disaster. Suddenly, in May 2005, Michigan stopped running Winfall without warning. Jerry was outraged - he was deprived of his favorite business, which he created thanks to his mathematical mindset, which gave a sense of purpose in life.

The next month, Jerry received a letter from one of his group members. He noticed that Massachusetts is running a similar lottery called Cash WinFall. It was slightly different from the Michigan one: the ticket cost not one, but two dollars, the numbers were chosen from 1 to 46, and the jackpot “spilled” down when exceeding not five, but two million. But otherwise it was pretty much the same. Jerry figured out the probabilities on paper, they were good. So he got into his pickup truck and traveled 700 kilometers to a city in Massachusetts, where a shopkeeper lived who could help him. Jerry didn't know yet that this time he would face ruthless competitors.
Seven months earlier, Massachusetts Institute of Technology (MIT) student James Harvey had suggested an exciting adventure to his dorm roommates. James studied mathematics and for his educational research project studied the differences between the two major lotteries, Powerball and MegaMillions, to find out which one has the best chances of winning. He also researched local lotteries in the state, quickly discovering Cash WinFall's weak point. In a matter of days, Harvey attracted about fifty people to his adventure, collecting $ 20 from each and buying 500 lottery tickets. On February 7, 2005, a team from MIT won $ 3,000 for a profit of $ 2,000.

Curiously, the students weren't the only ones who played Cash WinFall for large sums at the time. Boston University biomedical researcher Yin Zhang also discovered a flaw in the lottery. The scientist recruited his friends to the game and organized the "Dr. Zhang's Lottery Club" partnership. His group began to win $ 300,000-500,000 in overflow weeks. Zhang quit his job to immerse himself in the lottery.

However, Zhang's ability could not match the pressure of the MIT group. After the first win, a group of 40-50 players formed, many of whom were professors with significant financial capabilities. Harvey brought in fellow student Yuzhan Lu to help manage the group. He helped Harvey found Random Strategies LLC, which consistently bought 300,000 tickets for $ 600,000. It would have been easier for MIT students to print tickets themselves and then pay for them in stores, but this was prohibited by the rules of the Massachusetts lottery. To protect against fraud, tickets had to be bought manually.

Meanwhile, Jerry Selby made it to Massachusetts. He approached the store owner Paul Mardas with an unusual proposal: to begin with, Jerry will buy lottery tickets for about 100 thousand. In exchange, Mardas receives a stake in GS Investment Strategies LLC. Paul agreed and a few days later Jerry returned with Marge. They decided to split the task of printing tickets for two, so they started looking for a second store. It was Jerry's Place in a nearby town. Every morning, Jerry and Marge got up at 5:30 and went to print tickets, put them in bundles of 5 thousand dollars.

Billy's Beverages Paula Mardas in Sunderland.

Jerry's Place in South Deerfield.

The amounts regularly spent on the purchase of tickets gradually reached 720 thousand dollars - 360 thousand tickets for one drawing. It didn’t violate the lottery rules in any way, so Jerry felt safe. In addition, in 2008, he heard rumors that another large group was participating in Cash WinFall using similar strategies. For five consecutive years, Jerry and Marge returned to Massachusetts six to ten times a year. Their system has never changed: they printed tickets, counted them at the hotel, received one general receipt of the winnings, and returned to Evart with the losing tickets in the trunk. Once a lottery employee looked into the store where they bought tickets, but did not find anything illegal in the couple's actions.
Meanwhile, the US economy was crumbling. The mortgage crisis, the rescue of banks by the state, bankruptcy of automakers and panic, panic, panic. Chrysler's plant near Evart closed, laying off more than 120 people.

Selby was doing much better. By 2009, the corporation had won more than $ 20 million (after tax, $ 5 million left), but Jerry and Marge's lifestyles have not changed. They continued to live in the same house and collect non-won tickets in the garage.

However, the MIT group at this time planned to attack the game with an unprecedented level of aggression. Although she ended up winning 3.5 million for all time, profits fell for one simple reason: competition. A group from MIT, Zhang and Selby had to pour in large sums to win, and they had to share the winnings. The students decided to find a way to kick the rest of the groups out of the game. They came up with an idea: instead of waiting for the "overflow", you can arrange it yourself, making a huge bet. Prior to the WinFall draw on August 16, 2010, the state did not announce a “spill-over” because the jackpot did not reach 1.6 million and the likelihood of reaching 2 million was low. Harvey and his colleagues decided it was their time. In three days, they bought as much as 700 thousand tickets, paying $ 1.4 million. This was enough to surpass the 2 million jackpot target and cause an overflow. Nobody knew about this, so the big players, including Jerry and Marge, did not buy tickets. As a result, the MIT group made a profit of $ 700,000.

Jerry was furious. It is one thing to make large bets according to a certain system, as he did, and it is completely another thing to manipulate the mechanics of the game in order to oust competitors. "They deliberately put us out of the game." He decided that the next time the MIT group tried to attack, he would be ready.

He suspected that something would happen around Christmas Day. The draw has been set for December 27, when most of the stores will be closed. Due to the low activity of ticket buyers, this will be the perfect time for the MIT attack. Jerry asked Mardas to contact the lottery organizers to see if there were any peak sales. It turned out that sales in five stores increased sharply. Leaving Marge at home, Jerry went to Jerry's Place, where he spent the rest of the day printing 45,000 tickets.

Already printing tickets alone, he heard a knock on the store door. The polite young man said that his name was Yuran Lu. "I'm from a different club, and I think it would be mutually beneficial if we knew how much each side is investing in the game." The guys from MIT offered to come to an agreement - instead of placing bets all together, it would be more logical to play in turns. It was unethical from Jerry's point of view, so he refused and closed the door.
End of the game
After receiving information about the mysterious winnings in the Massachusetts lottery, Boston Globe investigative reporter Andrea Estes began looking for facts. She looked at the list of the lucky ones and found out that the Michigan company GS Investment Strategies LLC was massively buying tickets from Paul Mardas' store. When she asked for official data, she found that at least two other groups were making large purchases. This information became the basis for Andrea's article titled "Winning Game for the Few Knowing". The article mentioned Jerry and Marge, as well as Lou. "Some smart people have learned how to get rich while others pay for their winnings." The story caused a sensation. State politicians publicly criticized the organization of the lottery, and the story was picked up by national media outlets such as the Washington Post, HuffPost and Fox News. Two days later, Treasury Secretary Grossman announced that Cash WinFall draws would be discontinued within a year; in the meantime, the lottery will restrict each store to buying tickets to no more than $ 5,000 per day.

Jerry could not believe it - in the article he and others were presented as scammers, big gamblers who profit from ordinary people. How did the bulk ticket purchase turn out to be a scam? If anyone is to blame for fraud, it is the lottery itself, which took 40% of every ticket he bought. He decided to contact Estes and finally give her an interview, talking about the actual manipulation of the game - how a group from MIT in 2010 deliberately caused "overflow". There were two more articles in the Globe, further angering the public, so in October 2011, Grossman announced that he had asked for an investigation into the lottery's procedures.

Jerry and Marge last played Cash WinFall in January 2012. It was an incredible adventure: In total, over nine years of playing in the two states, they earned approximately $ 27 million. Profit was $ 7.75 million excluding taxes, this money was distributed among the players of GS Investment Strategies LLC.

At 79, Jerry still occasionally plays the lottery - the Powerball jackpot. (He's been working on a system for picking "winning" numbers, but to no avail.) From time to time he walks into a casino and plays Texas Hold 'em. Marge goes with him, but she doesn't like gambling. Jerry once gave her $ 100 to play one-armed bandit, and at the end of the evening, Marge returned the same $ 100 to him. Harvey and Lou started an internet startup and got into technology. Selby used their winnings to develop a new business: construction finance. Jerry gives loans to companies that build housing, including for the former military. “Marge is one of my biggest investors,” he says.

All these years later, Selby still get together with the members of the lottery group, remembering their adventures.
KlauS 28 february 2021, 12:20
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