Mar 29, 2011

Kerala Lotteries & Financial Derivatives

I recently came across an article which explains a new ( and I should say, ingenuous ) way of operating lotteries in Kerala.. For non-Keralites, lottery industry is something thats very sensitive politically in Kerala, especially considering the impending state elections in April..

The method goes like this

1) There is a reference lottery - Bhutan/Sikkim . Suppose they sell a lottery ticket in which ticket number has 10 digits
2) The Kerala lottery operator will float a shadow lottery to this, bearing a ticket with 3 digit ticket number & lets say, two/ alphabets ( the alphabet part is just to have a unique ticket number )
3) The winners will be identified on the basis of last 3 digits of the winning reference lottery ( Bhutan/Sikkim )
4) Of-course, the ticket cost & prizes are vastly different for the shadow lottery ( They have factored in the law of probabilities :) )

The interesting thing about this is that it is almost equivalent ( except the winning part ) to taking positions in financial derivative markets. For eg: if you are in US securities market, you can take a hedge / bet with respect to the value of an asset which you actually don't own.. You can bet for / against a sub-prime mortgage /bond  which you actually don't own.

Legally, two obvious problems with this is that you are evading taxes and using the brand of someone else surreptitiously.. My question here is more from an economic angle. Is it beneficial for an end-investor to put his money in a shadow lottery or main lottery ?  I don't intend to do a pay-off calculation here as I don't have the exact winning amounts / schemes.. But given a chance, I would any day put my money in shadow lottery as probability of winning here is higher. Maybe the winning amounts are smaller, but for a normal lottery investor, anything thats over and above the ticket cost is psychologically attractive..

Coming to think of it, I see this as a market force which has come up to exploit the inefficiencies in the traditional lottery system :) .. And, you cannot avoid this 'shadow business' as fundamentally it is very attractive to the end-investor , be it lottery industry / financial markets

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