It should come as little surprise that Berkshire Hathaway’s ($BRK.A) Warren Buffett is the backer of Quicken Loans Billion Dollar Bracket Challenge. The contest – which will award a billion dollars to anyone who can fill out a perfect March Madness bracket – has odds that are truly astronomical. A randomized bracket’s odds are 1 in 9 quintillion. Even the savviest sports picker probably has around a 1 in 128 billion chance. In the seven year history of ESPN’s online bracket challenge, in which hundreds of millions of people have participated, only a single person has even had a perfect bracket after the first round.
While Buffett hasn’t disclosed the premium he’s making, rumors put it around $10 million. From an insurer’s standpoint, it’s a no-brainer. Take, for instance, the risks property insurers take when covering coastal communities. There’s a 72 percent chance the US will be hit by a major hurricane this year comparable to Sandy, which devastated property insurers like Tower Group (TWGP) when they had to pay out claims.
On the other hand, the chances of someone actually picking a perfect bracket are more comparable to say, a meteor over 5 kilometers in diameter smashing into earth and wiping out life as we know it. A meteor even 1 kilometer, enough to cause mass extinctions, hits the earth "several times every million years," acccording to NASA, making any kind of insurance policy a bit of a moot point.
Conversely, if every man, woman and child in the US filled out a bracket every year, in 290 million years there would only be a 1 percent chance of a perfect bracket. If the wager was between picking a perfect bracket, and a meteor as wide as Manhattan smashing into Earth and wiping out civilization before Creighton takes a single three-point shot, the smart bettor would pick "all games canceled due to exodus of humanity" every time.
Even if someone were to get close, it wouldn't matter because the contest would probably be cut short. Buffett has gone as far to say that in the completely unlikely event someone actually comes close, and gets the first 60 out of 64 correct, he would attempt to buy out the winner. After all, they either get $1 billion or “second place,” which is a relatively paltry $100,000.
In short, Buffett just pocketed $10 million on an event whose natural conclusion is far less probable that the absolute destruction of humanity. And that’s the kind of odds any investor who thinks they won’t go the way of the dinosaur anytime soon should take.
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