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Take Buffett's Billion

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127 pointssongzme123 comments

Buffett is making big money on this deal, increasing his personal brand and here is how (my guess):

Quicken is paying Buffett for the advertising exposure right before tax season.

Quicken is also taking out prize indemnity insurance[0] from National Indemnity Company[1] which Buffett owns.

Even if someone happens to beat the odds (which they won't) it's still a win-win for Buffett because he has stacked the odds in his favor.

Its 40 annual payments of $25M or a single payout of $500M. Also, they are only allowing 10M people to register.[2]

We should all take a note from his playbook on this one.

[0] http://en.wikipedia.org/wiki/Prize_indemnity_insurance

[1] http://en.wikipedia.org/wiki/National_Indemnity_Company

[2] http://www.latimes.com/business/money/la-fi-mo-warren-buffet...

This sounds very much like Buffet, but I doubt Buffett's being paid directly for it (He protects his image and reputation very carefully and wouldn't sell it out for any amount), just his insurance company for the premium.

It sounds like he just came up with the idea for fun.

Of course Buffett isn't getting paid directly, but if you look at the 2010 SEC filing[0] he owns 32.4% of the voting shares and 23.3% of the value of those shares. In my book Buffett and Berkshire are synonymous.

You are right that he is having fun with this, who wouldn't?

[0] http://www.sec.gov/Archives/edgar/data/315090/00011931251015...

On the topic of reputation Buffet was once quoted as saying, "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

So while he no doubt guards his reputation carefully if you follow him at all you'll notice he is also very much a sales man and often promotes his businesses and products. Berkshire's annual stock holders meeting is like a Berkshire brands convention and Buffet himself encourages people to take the opportunity to patronize the businesses.

In that sense I don't find this surprising at all.

I've always found it odd how the lotteries do that. Win X Dollars. You can take it now as X/2 dollars, or you can take the 'whole thing' annually for the rest of your life in small amounts... where they mean less over time due to inflation... and you have to hope that the entity paying out is still around decades later. There doesn't seem to be a way to take your winnings in a way that preserves the purchasing power of those winnings at the time they were won.

It's because the annuity's figure is the purchasing power of those winnings at that time--the value you see as a jackpot is based on an annuity over a period of years. You're buying a lottery ticket to win a $XM dollar Y year annuity, with an allowed early exit (with penalty).

The choice to take the annuity or lump sum looks like its based on projected tax rates and projected return on the investment.[0]

[0] http://www.businessinsider.com/should-you-take-the-annuity-o...

uhh... correct me if i am wrong, but the PV of an annuity is generally NOT equal to X where the annuity pays N payments of X/N

So when they are saying "40 payments of $25 mil" that doesn't mean that $1B is the PV of said annuity. (I might have misunderstood you though)

America is the only country I've ever heard of that does this, BTW.

Marketing. It allows you to advertise a prize about double of what it normally would be.

Taxes. Lottery winnings may be taxed depending on state taxes. Though it is not clear if this is a lottery or gambling. Gambling winnings are not normally taxed in the US.

> Gambling winnings are not normally taxed in the US.

Where did you hear this? They're income, and subject to the income tax.

Not only that, you can deduct gambling losses from your income, if you're unlucky.

Not accurate. For US federal taxes, you can deduct gambling losses against gambling winnings, but not against your income.

If you earn $50,000 in income, $X in winnings, and $Y in losses, you pay taxes on $50,000 of income, plus taxes on $X-Y of winnings (if it's a positive number).

You can only deduct them from your _winnings_, not income[1]. You can't go to Vegas, blow $10,000 on a single round of blackjack and deduct that at the end of the year.

1: http://www.irs.gov/taxtopics/tc419.html

Taxed in the US but not in Canada I believe (IANAL etc)

Or maybe that is irrational, and your tendency towards Loss Aversion is lying to you. After getting your first cheque for $25M, your biggest worry shouldn't be about losses due to inflation on the remainder of the $1B sitting in trust, as you did not have $25M before, and now you do.

Berkshire isn't making big money on this.

Big money for his company these days is to generate a couple billion in profit off of a deal (eg the Bank of America, Goldman, GE deals).

The tiny premium this bet is likely to pay isn't worth getting out of bed in the morning for Buffett, except it was his idea and he likes to have fun with things of this sort. It's his version of a weekend golf bet (with the odds radically in his favor).

There is also a touch of irony. Buffet has always been about rational investment. Nothing explains his approach better, than "Always take advantage of market folly". If you don't know who the mark is, then it is you. Its a good way of making a point, possibly for the last time as he is 83 and will retire or die soon.

This is why I'm going to the Berkshire annual meeting this year. It might be my only chance to see him in person.

The deal is with Quicken Loans, not Quicken/Intuit. The companies are no longer related and have separate ownership.

Quicken Loans is owned by Dan Gilbert who also owns the Cleveland Cavaliers, so he's obviously interested in basketball.

Fun Side Note:

The $10M Ansari XPRIZE payed out to Burt Rutan & SpaceShipOne was "hole-in-one" indemnity insurance because the insurer took the bet that a team couldn't get to space twice within the allotted time period. The Ansari family put up the money to pay the premium to get the $10M insurance. Genius.

This is also a fascinating story about thinking outside the box on a galactic scale.

http://www.thespacereview.com/article/234/1

http://www.ted.com/talks/peter_diamandis_on_our_next_giant_l...

The expected value of an entry is something like ten cents assuming you know a lot about basketball.

This is like saying, "let's all work together to hack ten cents into eleven cents" (except we're doing something secret to do the hacking, which we won't tell you, but trust us. ps we love Nate Silver)

Edit: Actually, Now that I think about it more, the people who made this are probably concerned with too many teams using the same statistical techniques, and choosing the same bracket. Assuming several teams find this "highly likely" bracket, and it wins, those teams would all share the prize. This way, the organizers can choose their favorite bracket, and help ensure that other brackets aren't going to share the prize with them.

The "highly likely" bracket is still only going to have astronomically small odds.

Yeah, "highly likely" is all fun and games until a college like George Mason comes in a destroys every single bracket.

Yea, I don't think there are too many "highly likely" brackets anyway--the first couple rounds are brutal. There are definitely "highly likely" Final Four's, but just one very minor upset on day 1 will ruin a perfect brack.

If you figure that the selection committee knows something about basketball and at least to a first approximation tries to slot teams correctly, it's relevant that the five seed has only beat the 12 seed 2/3s of the time and it gets worse from there. So you are already down to less than 20% odds of guessing the five seeds in the first round.

that's kinda paranoid thinking given the EV of the "best" bracket is probably like $1 instead of 10 cents. A lot of work to make a dollar.

It's a pretty interesting idea haha. if only there was some way (without spending a lot of legal money) to ensure entrants into the pool all split the money.

I think your edit is where the real story lies. Assuming a given probability of Seed_i beating Seed_j, you could make sure that multiple brackets follow that distribution, rather than just picking the likely winner. By working in concert, rather than alone, you can cover the widest possible population of brackets.

Or, it's a bit like giving away free lottery numbers, on the condition that a winner pays a very reasonable 10% of their winnings.

A gullible player will see it as great deal, with no upfront cost and no downside. A less gullible player will ask what contribution (none) the "seller" made to earn 10% of a win.

Well, in the scenario you describe, they're paying for the lottery ticket... they've clearly "earned" 100% of the wins.

He said lottery numbers, not tickets.

Ah, my mistake. In the number-only scenario, the value that person provides is organizational / financial. Every so often (though rarely), the expected value of a lottery ticket is greater than the cost of the ticket. Imagine a simple 50 choose 6 lottery, where a ticket costs $1, you choose six numbers between 1 and 50, and if you get all six right you win the jackpot. If, through the vagaries of chance, the jackpot reaches $30 million, you could buy one of each possible ticket (there are 15,890,700) and guarantee that you'll hit the jackpot. If, as is normal, the jackpot is shared among all winning tickets, then you have a decent chance of winning $14 million and an also-decent chance of losing $1 million or more, so it's still kind of risky in that scenario. But we can imagine the jackpot reaching, say $50 million, where even if another person gets a winning ticket you still make a hefty profit.

That's great if you have sixteen million dollars to hand, but if you don't, you could join a "lottery mining pool" ;) where you buy a certain number of tickets and the pool together covers the ticket space. In such a case, the person giving you the numbers is performing the valuable function of preventing collisions within the pool.

Fair enough, and a good point.

I like to imagine Buffet personally knocking a key player's knees in if it appears that someone is getting too close to winning -- like some Adam West Batman villain.

"Let me show you why the first three letters of my name spell 'War'."

Cute, but pretty much the opposite of how he seems to be in person.

You have a weird definition of cute.

In my mind he was kind of a 60's Penguin like character. Cute; very campy.

Here he is in the 60s (http://www.youtube.com/watch?v=REhg_bv7srM), clearly his Bruce-Wayne-like cover identity. /s

I was more thinking of 2010's Buffett as a 60's Batman Penguin character.

He did say this:

Buffett said he would be willing to strike a deal with anyone who gets deep into the tournament with a perfect bracket. “If you get to the Final Four with a perfect bracket, I may buy you out of your position,” Buffett said. “I’ll make you an offer you can’t refuse. I will accept your phone call, you better believe it.”

http://www.latimes.com/business/money/la-fi-mo-warren-buffet...

Buffett won't have to pay a billion dollars. As he mentions in one of the articles linked, at the end:

"If you get to the Final Four with a perfect bracket, I may buy you out of your position," Buffett said. "I'll make you an offer you can't refuse."

http://www.latimes.com/business/la-fi-buffett-basketball-bet...

Something like offering $500,000,000 up front? There's no question I'd take the $25 mil offer, put it in a trust and seriously mess with the world (in a nice way).

Haha, that would be so awesome. Presumably buffet is betting that you're going to take a lesser cash prize to avoid the risk of losing in the final 4. But at that point, if the buyout offer is huge but you are still +ev to stay in, you can probably turn the tables on him and get a big insurance company or investment bank(or a conglomerate of them) that has the bankroll to buy you out and see the matches play out.

Indeed. I have trouble imagining many people turning down whatever his offer would be at the final four though.

I wonder how much would he offer if you get to Final Four.

If you get to Final Four as an individual without FU money, then Buffet would probably offer a 50 million single payment and you would probably take it as it would still be a life changing event (see Kahneman's research).

However, if a syndicate such as the one in the link gets to the Final Four then Buffet would probably have to offer something closer to $125 million.

The 60 odd coaches should get together and rig the whole thing for 15+ million a piece.

Surprisingly not worth it for many, most of these coaches have seven figure salaries and are employed for years or even move on to the higher pay in the NBA, they wouldn't want to jeopardize that.

Plus some of the higher paid coaches wouldn't go along with it because it's too risky. Use Duke's coach as an outlier, he earns $7 million a year and has been with the team for thirty years, good luck getting him to risk that career for twice his annual salary.

Calipari makes 5.2 last I checked, and he's tied into advertising all across kentucky.

Or the players for $1M. That's a much bigger bump for them.

Vs. their future NBA earnings?

The vast majority of players in the NCAA tournament have effectively zero chance of ever playing, much less starting and making millions, in the NBA. Consider the automatic bids that go to conference winners, the benchwarmers and walk-ons at even the top tier schools, etc. Remember, only 60 people are drafted into the NBA every year (not counting the rare players that enter through the D-league).

Edit: So, "yes" is my response to your question

But if you wanted enough people to throw a game, you'd need the future NBA stars on board too.

Image of Warren Buffet courtesy of (i.e., served from) blackmbawomen.com.

http://www.blackmbawomen.com/wp-content/uploads/2013/05/warr...

Very classy tBB.

I noticed that too, the pic is one of the first served up when you search for "warren buffet" in google image search.

Here is your mathematical odds of doing a perfect NCAA bracket.

http://www.youtube.com/watch?v=O6Smkv11Mj4&feature=share

The very first thing that comes to mind when I read this - why on earth would anybody honor their agreement with $500mm on the line? I'm a pretty honorable person, but I'll admit - I'd be highly tempted to just take the money and ignore the pool.

Is there something that $1B buys you that $500M doesn't?

Not necessarily, but you could get two of each something.

Yes. A sports team in one of the major American sports leagues.

Actually, the bottom 11 teams in the NBA are all worth less than $500 million according to Forbes[0]

[0]http://www.forbes.com/nba-valuations/

Actually, a minor league baseball team is considered a much better investment (plus they're cheaper).

http://www.forbes.com/sites/chrissmith/2012/06/08/billionair...

I imagine they'll have people sign a binding agreement to participate.

$500M buys a lot of lawyers though.

Actually, Buffett already did something similar with the Pepsi Billion Dollar Sweepstakes:

http://en.wikipedia.org/wiki/Pepsi_Billion_Dollar_Sweepstake...

Buffett will definitely pay. It's less than 1.2% of Berkshire's cash on hand. And only about 0.24% of Berkshire's book value. Roughly the amount his personal wealth fluctuates each day.

source: http://finance.yahoo.com/q/ks?s=BRK-A+Key+Statistics

I've thought about the fluctuation thing. Say I was to misplace $1 ... I probably wouldn't notice. $100 would probably catch my eye, but is that only because my total wealth is a few orders of magnitude above that?

The question is if I commanded say, $10 billion, could I just as carelessly misplace say, $10,000 as I currently can with $1.

I think so, yeah. I noticed it when I started making more money when I got a full-time salaried job. Before I'd quickly notice a couple dollars missing from my account or I'd really rely on that $50 for gas.

Now I could get gas 3-4 times per week and I wouldn't even notice. I'd imagine if I was worth billions I could easily not notice 10, 20, 30k missing. Then again Buffet is notorious for being frugal so perhaps he would notice.

Probably depends how frugal you are. I'd expect for a lot of people it would come to carelessly misplacing $10,000. Especially in the sense of being happy to change the money in to a frivolous good that you forget about or believing you'd just left it laying around the house and will find it later.

Of course. Think of it as a percentage of your income, or wealth that you're OK with being unable to account for. Let's say that figure is 1% of your income.. so you make $50,000 per year, and somewhere $500 goes missing. No biggie.

That 1% figure is the same if you're McDonald's or Buffet, it's just that 1% of their income is a very big number. It's still only 1% though, so it's equally as unimportant to them as your 1% is to you.

Though 1% of McDonald's income pays for quite a few people to take it very seriously. (Even if McDonald's, the corporation, does not.)

Has anyone read what happens if there are multiple winners? Do they split the prize? Is one winner chosen at random? Do they all get a billion? It really affects how you should play.

For example, a common bracket might be to pick all the top seeds. In some sense that's the most likely outcome. But that may be a bad entry as there would certainly be lots of people who enter that.

In a similar way, the worst possible lottery entry is 1 2 3 4 5 6 is the most common lottery entry, and hence the worst since if it did come up, you'd have to split the prize many ways. [1]

[1] http://www.economist.com/news/britain/21573993-britons-love-...

They split the prize.

"The winner will have the option of taking 40 annual payments of $25 million or a lump sum of $500 million. Multiple winners would split the money."

http://www.latimes.com/business/la-fi-buffett-basketball-bet...

I don't think an upset free bracket has ever happened. Some of that is because of the first round match ups; 7 plays 10 and 8 plays 9, and if the seeds are good, those games are toss ups.

Yes. The most likely outcome is still very unlikely.

That's true. But only a vanishingly small fraction of the possible brackets has come up in history. Similarly, the lottery ticket 1 2 3 4 5 6 has probably never won. Since all lottery tickets are equally likely, it still makes sense to avoid it, since if it did you have to do more sharing. (Similarly people tend to play their birthdays, so number that can be dates should be avoided.)

It is more fun here, because all brackets are not equally likely. So you want to pick your most likely brackets, but only if you don't think others will be playing the same bracket.

The lottery is at least theoretically based on perfect information. I'm not sure it is a given that the 8-9 match ups are more likely to go to 8.

(but I did sort of overlook how few brackets have been played out)

Let me see if I got this straight: There are 2^63 possible outcomes, that's 9,223,372,036,854,775,808, Buffet is allowing only 10,000,000 guesses and if more than one entry has the same prediction they split the prize.

So I guess the idea here is to collaborate and both pick the more probable outcomes while avoiding duplication. If the outcomes were truly random even without duplication the probability of anyone winning is only 1 in 922,337,203,685. And without cooperation I bet the will be tons of entries very close the always pick the top seed strategy.

Assuming duplicate entries could be avoided the trick would be to pick the 10,000,000 most likely outcomes. Hmm...

I would love to see the paperwork they use to attempt to prevent defection by the winner if any.

Defection? I'm probably missing something about the context - people will defect from USA if they win and authorities will want to prevent it?

>This term is also applied, often pejoratively, to anyone who switches loyalty to another religion, sports team, political party, or other rival faction(themself). In that sense, the defector is often considered a traitor by their original side.

Interesting idea, but rather than assigning picks, might be nearly as good to simply have members of the cooperating group register their picks, so that they can avoid wasteful duplication.

Then, when someone proposes a duplicate, suggest to them either the minimal-change-for-uniqueness, or the-best-yet-unclaimed from the pool analysis.

In fact they could offer both to appeal to a wider range of participants, and perhaps offer a software tool (like a bookmarklet) to make the dup-check/autosuggest as easy as possible.

Forget the game theory the odds are still insane.

edit

Also consider that statistically significant deviations away from the huge list of ideal brackets they come up with are likely to happen. That's the nature of March madness, usually at least one bottom seed flips a top seed or two. Guessing which one will do so is a fools errand. So even if lots of people participated in this the idea that they would all be increasing their odds of winning could be an illusion.

> usually at least one bottom seed flips a top seed or two

No, a #16 seed has never beaten a #1 seed since this format was started in 1985.

Matt Levine who writes for Bloomberg is a great daily read. He posted about this about a week ago and it provides a good overview of how this type of thing is priced/insured.

http://www.bloomberg.com/news/2014-01-21/buffett-makes-milli...

And his analysis is almost embarrassingly bad. I cannot fathom how someone who worked in investment banking at Goldman could be so far off in how to price this.

This is fantastic if only because it prevents me from spending half a day doing the statistics myself to get to: it is reasonably possible to get the odds down around 1 in 1,000,000,000.

Is it worth an EV of $1 to participate in this? Nope.

On to the next thing.

correct me if I'm wrong, but couldn't you just generate every possible combination of brackets and "assign" to each participant the top most statistically likely combinations?

or is this precisely what they're doing?

Sounds like that's what they're doing.

I thought of this too but no one at work wanted to spend a bunch of weekends hacking away :/.

I figured it would just be a fun way to learn and apply a bunch of machine learning and pattern recognition concepts.

I'll probably still try to do that.

Signed up though.

He's insured if someone wins, it won't even be his money if I understand it correctly.

All a rich person's game. Soak the insurance rates for the next people.

Berkshire Hathaway (his company) is the insurer, not the insured.

So he will lose money if someone wins (but earn a pretty good amount of money if no one does).

How many seconds will the Quicken Loans website last on March 3?

How long is there to submit entries. How long will it take, will it be bot-able in a reasonable time?

There's probably a captcha or something similar to prevent bots. The number of entries is capped at 10M, and I don't think the time the contest is open will be the prevailing constraint, given all the publicity.

Did anyone else's email address get auto submitted without having to hit submit?

So...would you take the $500M or $25M/yr for 40 years?

$500M up front, without a doubt.

Same here. The $25M/year is a great insurance policy to keep you from doing something stupid and blowing it all, but I'd definitely take the ~$300M or so up front after taxes.

You would have to do something monumentally stupid to blow $500m. Or even $300m.

One jumbo jet please!

You can say this, but the phenomenon is quite common. There is no shortage of people doing monumentally stupid things.

I agree, but you'd be surprised. Trusting the wrong people to manage it for you is a great way to start. Getting a god complex and becoming involved in high cost ventures in business you don't understand is a great way to finish.

The $25m/year is pretty bad value.

Even at earnings of only 3% above inflation, that's still $1.6B after 40 years. When you factor in the risk that a 30 year old might be dead after 40 years (about 20% if I'm reading this AU life table correctly), I would prefer the $500m upfront.

The long-term ramifications of a guaranteed $25M/yr for that amount of years could start science labs, schools, provide free education for a small country for 2 generations.. although you may find you could do OK spending the 2-3% interest on $250M, say $500,000 a year, and have that for many more years to come (assuming you only needed 50M to live on after taxes and banking systems stay afloat).

What's the tax on a 1 billion prize?

The current top tax bracket in the US is 39.6% so if you took the 500M all at once (instead of paid out over 40 years) you'd end up with just over 300M after taxes.

It must be nice living in not-California.

Ah yes, I forgot about state taxes. If you're unfortunate enough (in that regard) to live in CA that's another 12.3% knocking your haul down to 240.5M. Could be a little bit less than that in some cities as well I suppose.

only for US citizens, boo.

The likelihood of Buffett actually paying this prize is even lower than that of someone actually winning it.

If someone wins, Buffett will pay, as he's insured away his risk (admittedly with a company he owns).

How does insuring away his risk work?

If the chance of anyone winning is y and the prize is x, you can pay the insurer (x*y)+z dollars to pay out the x dollars in the event that someone wins. I'm sure z is probably tied to x in some way, but just know that z is the money that turns into the insurer's revenue in the long run.

You're basically paying the expected value(cost?) of the prize, plus a fee to the person who's insuring you. That way a billion dollar contest will not actually cost you a billion dollars, even in the event that someone wins.

"I'll pay you $1 million now. If anybody wins the prize, you're on the hook to give them the other $999 million. If nobody wins the prize, you get to keep the $1 million."

edit: And where I say $1 million, do some hand waving with the odds and figure out a number on which both parties agree

Buffet is the one (via one of Berkshire Hathaway's insurance companies) who is doing the insuring. Quicken loan is paying buffet/berkshire a, likely large, premium to pay the billion if someone wins. Given the odds are 1 in not gonna happen, it's likely an easy million or two for buffet, and free promotion. Buffet/Berkshire also insured the pepsi billion dollar prize thing a few years back.

I think he is self-insuring in this case.

The reputation loss of not paying up is far too great for him not to pay the prize.

Surely he'd also be indictable on fraud charges ... though it wouldn't surprise me if he has a lawyer who's made some way for him to wriggle out without making it a fraud.

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