In a surprising announcement, Quicken Loans said it has partnered with Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and Warren Buffet to offer the opportunity of a $1 billion payout for a perfect bracket in this year's NCAA tournament.
Quicken, whose CEO is Cleveland Cavaliers owner Dan Gilbert, has named the contest the "Billion Dollar Bracket Challenge," and Berkshire Hathaway has insured the $1 billion payout for the perfect bracket. The winner, if there is one, will have the option to receive $25 million annual installments over 40 years or a lump-sum payment of $500 million. If there are multiple perfect brackets, the $1 billion will be split evenly among the winners.
"Millions of people play brackets every March, so why not take a shot at becoming $1 billion richer for doing so?" Buffett said of the decision. "While there is no simple path to success, it sure doesn't get much easier than filling out a bracket online. To quote a commercial from one of my companies, I'd dare say 'It's so easy to enter that even a caveman can do it.'"
Buffett said the benefits could go beyond just the $1 billion payout, as he told CNN's Poppy Harlow that he'll watch the championship game if there is someone who has the chance to win -- and that's not all: "I will invite him or her to be my guest at the final game and be there with a check in my pocket, but I will not be cheering for him or her to win. I may even give them a little investment advice."
And the benefits don't stop at the $1 billion grand prize. Quicken also said it will award $100,000 to each of the top 20 brackets, to be used toward buying, remodeling, or refinancing a home. In addition, Quicken said it will donate $1 million to non-profit education organizations in both Detroit and Cleveland.
Before the NCAA tournament in 2012, DePaul University math professor Jay Bergan said in a YouTube video that the odds of selecting a perfect bracket was equal to 2 raised to the 63rd power. That's 9,223,372,036,854,780,000.
Your odds, in other words, are 1 in 9.2 quintillion.
He expounds that math a little further, noting that the NCAA bracket is a little more predictable than sheer random chance, so that the odds are actually closer to 1 in 128 billion.
Berkshire Hathaway is at its core an insurer, which is exactly the function it's serving in relation to the tournament challenge. One of the principal functions of insurance is attempting to find the expected payout of an insurance policy by determining the likelihood that an event will happen and then charge appropriately.
If an insurer determines there is a 1-in-3 chance that an event costing $300 will occur, it will charge the three people involved at least $100 each -- and probably more -- to insure against its possible losses.
Put simply, if the odds are really 1 in 128 billion, Buffett is likely to come out on top, as the expected payout is actually less than $0.01. Even if the insurance policy Quicken took out from Berkshire cost just $1, it means Buffett has an expected payout equal to a 10,000% return on the investment.
Warren Buffett once said he has two rules: "Rule No.1: Never lose money. Rule No. 2: Never forget rule No.1." All indications are that that that's true with this insurance policy.
But that reality shouldn't deter anyone from filling out a bracket with the hope of meeting Buffett. And the $1 billion wouldn't be a bad reward, either.
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