Resale Prices of Lottery Tickets

A few weeks ago I went through exactly the same calculations about the California lottery that Professor Nelson Rose described (Editorial Pages Dec. 6). I then (half-jokingly) tried to convince my brother that we should start a ticket brokerage firm and make a market by matching buyers and sellers of $100 lottery tickets.

As an alternative, I suggested that $100 winners could sell a one-half interest in their ticket. This still would leave them with a shot at the big money while recapturing some of the extra $190 that their ticket is theoretically worth.

But the California lottery offers an even more enticing arbitrage opportunity. As Professor Rose pointed out, the finalists who get a chance at the “Big Spin” have an expected payoff of $119,000. Their actual payoff will range from $800,000 (present cash value of $2,000,000) down to a pitiful $10,000 (barely enough for a new car these days).

Suppose a wealthy speculator offered to reduce the finalist’s risk by buying a half-interest in the finalist’s winnings. For example, he might offer $25,000 for a half-interest. It’s theoretically worth $59,500, but there are tax considerations, and the speculator will demand a large profit for his risk assumption; the actual market price will depend on the supply and demand of wealthy speculators.

Now the unlucky finalist whose ball falls in the $10,000 slot (as it will 40% of the time) will collect a respectable $30,000. If the ball falls in the $50,000 slot (30% probability), the finalist will still keep $50,000. A $100,000 jackpot (20% probability) will leave the finalist with “only” $75,000. And for the $2,000,000 grand prize, the finalist will have to make do with $1,025,000 ($425,000 present cash value).

I know I’d certainly sell a half-interest if I were the finalist.

DANIEL WIENER

Simi Valley