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Did Warren Buffet Really Risk A Billion Dollars?

March 25, 2014 by Kosmo 5 Comments

After the first week of the NCAA tournament, the field has been winnowed from 68 teams down to 16.  There have been winners aplenty.  11 seed Dayton and 10 seed Stanford face off Thursday in a game guaranteed to send a double-digit seed to the Sweet Sixteen.  Tennessee has won three games in the tournament, fighting from the play-in game all the way to Sweet Sixteen matchup against Michigan.  My Iowa State Cyclones lost star Georges Niang to a broken foot on Friday night but bounced back to boot hoops royalty North Carolina from the tournament.  95% of the country rejoiced when Mercer bounced Duke in the first round.  (Nothing personal against coach Krijawooski; it’s just fun to root against a perennial power.)

The biggest winner, though, is Warren Buffett.  None of the entries in Quicken Loans’s Billion Dollar Bracket Challenge made it through the weekend unscathed.  This means that Buffett will not have to pay up on the insurance policy Quicken bought from Berkshire Hathaway.

There was never much of a chance Buffett would have to pay up, of course.  Quicken actually did make it a bit easier than expected by not making people pick winners of the play-in games.  Tennessee/Iowa, for example, was one “team” for the purposes of picking winners.  If you flipped a coin to determine your picks, the odds of a perfect bracket would be more than 1 in 9 quintillion (a quintillion is a million billions).  However, a knowledgeable picker (someone who doesn’t pick a 16 seed over a 1, for example) can likely cut those odds to around 1 in 128 billion, according to DePaul University math profession Paul Bergen.

Even if you beat those incredible odds, you wouldn’t actually get a billion dollars.  You would get $25 million per year for the next 40 years, or a $500 million lump sum.  Half the value is already gone, and the tax man hasn’t visited yet.

Buffett also told ESPN’s Rick Reilly that if someone had a perfect bracket within only one game remaining, he’d attempt to buy out that person for $100 million.  In theory, that person would have a 50% chance of winning a $500 million lump sum, so their expected result would be $250 million.  However, it’s an all or none situation.  If you’re living paycheck to paycheck, would you rather have $100 million guaranteed, or a 50% chance at $500 million (plus a 50% chance of $0)?  I’d take the $100 million.  In fact, I’d take any amount that would allow me to quit my job and maintain my current quality of life until I die.  I don’t need to be fabulously wealthy – I’d happily settle for a life of leisure.  Sleeping in a bit in the morning, writing fiction until the kids come home from school every day, traveling a bit more – that would be just fine with me.  So the likely worst case scenario for Buffett would be coughing up $100 million.  Realistically, he could probably cut this down to $10-20 million and still get a lot of people to take the offer.  For many people, the difference between broken and $10 million is less than the difference from $10 million to $500 million.

There’s a point in this.  Sometimes it makes sense to lock in a positive result rather than risking it all for a better result.  Financial decisions should be made with your head and not your heart (or your greed organ).

Filed Under: Behavioral Finance Tagged With: march madness, warren buffet

Is March Money Madness a Scam?

January 8, 2013 by Lazy Man 5 Comments

Another day, another scam (maybe?). As Buffy the Vampire Slayer once famously said, “… must be Tuesday”. (Since it is actually Tuesday, I don’t mind referencing that twice in the last few posts.)

I got a Twitter shout out from Rob Wilson about a collaboration idea. He seems to run a reputable Rob Wilson TV channel, which has quite a few clips of him on his local news affilate as an expert. One of the videos mentions that Wilson is a founder of Blazer Capital Management. Rob Wilson passed the sniff test. He definitely does not fit the scammer profile.

I told him to email me with his collaboration idea. Wilson explained something called the March Money Madness Bracket Challenge. His idea was to create a “financial education tool with a gaming component to use sports as a way to educate people about finance and investing (topics many people don’t find fun or interesting).” This is a concept that I can certain back as I’ve felt that an entertaining game is a good way to learn personal finance.

It is patterned after the March Madness basketball brackets with 64 stocks in 4 regions: Consumer, Industrial, Financial and Technology seeds based on their YTD returns as of the end of Feb. “The “games” between the stocks in the bracket occur during one week in the real life stock market. The stock with the highest return during the week wins the “game” and so on until a champion is crowned.

At this point in the explanation, I start to have my doubts. How much financial education comes into play for Apple to beat Google in any given week? I would think that making money investing would be more motivating than a game such as this.

Where do I come in? I would be a VIP player and others could match wits against me in this tournament (I guess no one told Rob that it wouldn’t be much of a challenge.) The offer was on the table to give me incentives to get people to play the game.

As I looked into the March Money Madness (MMM) website a little further I saw that there was a $5 entry fee and the winner would get 50% of the entry fees. This seemed a little like a 50/50 raffle… and perhaps a bit of an illegal lottery. I did a little searching and found this for my state of Massachusetts:

“Q: Can a nonprofit organization hold a 50/50 raffle or distribute a prize from the money collected from the sale of raffle tickets?

A: A nonprofit organization may hold a raffle to award various prizes that are announced in advance, such as a motorcycle, trip or television. If, however, the prize is cash (such as in the case of a 50/50 raffle where the winner receives 50% of the proceeds) or a portion of the prize is derived from the raffle proceeds, the raffle may run afoul of the prohibition against pooling contained in M.G.L. 271, s. 16A and 17.”

As far as I know MMM isn’t a nonprofit, but the rest applies almost exactly as Wilson has designed it. You’d think that for-profit entities would be even more strict.

I expressed this concern to Wilson and he came back with “March Money Madness is not a pool, lottery or a game of chance. March Money Madness is a skill based game. As is the case with fantasy football, March Money Madness is not an illegal competition. The Unlawful Internet Gambling Act 0f 2006 (PDF) specifically excludes fantasy sports.” He also assured me that he worked with an attorney to ensure that the game is legal.

This reminded me that I read that office March Madness brackets every year are technically illegal. Surely, they would be a skill-based game. In fact, one could say that all betting on sports is skill-based to some degree. This was starting to remind me of bidding fee/penny auction scams where a strong case could be made that they are a game of chance while the ones running the auction claim it is a game of skill. In any case, since we had an easy parallel, I searched to see if the office pools were indeed legal as games of skill. Articles from LegalZoom and NPR confirm that they are not. The NPR one specifically states that making money off the bracket and crossing state lines are “almost certainly violating the law” as “virtually every state prohibits someone from conducting these types of gambling activities where they’re receiving profits for operating the gambling activity.”

I decided to check out the Unlawful Internet Gambling and Enforcement Act of 2006 (UIGEA) and after about 30 seconds of getting annoyed at the legalese (sometimes I earn my Lazy Man name), I decided to do more research elsewhere. That’s where I came across some of my strongest evidence in a Forbes article: Why Is Gambling On Fantasy Football Legal? According to the article UIGEA,

“carves out a safe haven for any fantasy or simulation sports game that:

‘…has an outcome that reflects the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and, in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical results of sporting events…

‘

In other words, fantasy sports are considered games of skill – not chance – if they can be won by successfully utilizing superior knowledge of the players involved. The Act adds that the game in question cannot have a prize that is determined by the number of players or amounts paid (think betting odds on game picks), but rather is established in advance of the game’s start.”

(I hope the quotes inside the quotes didn’t confuse you there.) At the very least this affirms the MA state law that the 50/50 part of the game is not legal as the prize would be based on the number of players and the price they paid.

The next question the article deals with is whether fantasy football counts as a game as skill, noting that losing a star player to injury could be considered bad luck. However, the article cites that this has been tested in the courts and they ruled “that fantasy sports are games of skill because players actively manage their teams, employing their sports knowledge and making strategic decisions.” So the skill would be in having good back-ups and navigating the bad luck that happens throughout the season. In the end, the author doesn’t seem to be believe that fantasy football counts as a game of skill noting that the high volatility of a player’s performance week to week could make it a game of chance. I have to agree. I played one season of fantasy football and I had the team that scored the most points overall in the league, but I finished with a 5-11 record as each week I got pitted against players who had their career days (Jahvid Best’s 220+ total yard game still stings.)

I strayed way too far from the yellow brick road there. Get back to the point, I don’t see how picking a bracket and submitting it once matches up with an active management. In fantasy football, there are many different options to deal with an adversity or under-performance such as pick up a free agent or make a trade. In MMM, if your top seed gets knocked out early, you can’t do anything about it except kiss your $5 goodbye.

Even if the UIGEA allowed it on a federal level, I would think that state laws would prohibit it. I realize that federal law supersedes state law. However, when a state makes something illegal like pumping your own gas in New Jersey, you can’t claim that safe-harbor due to the federal law.

As I publish this, I’m still waiting to hear back from Rob Wilson about the last several points. I suspect he’s slow in getting back because he’s getting a refund from his attorney. In any event, I won’t be participating in this scheme and I hope you don’t either.

Filed Under: scams Tagged With: march madness, Money

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