Warren Buffett offers US$1b basketball bet

STUART PFEIFER
Last updated 12:55 22/01/2014

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Even billionaires like Warren Buffett think watching sports is more fun with a little money on the line.

Buffett's Berkshire Hathaway Inc. is insuring a Quicken Loans contest that will award $1 billion to anyone who can correctly guess the winners of all 67 games in this spring's NCAA men's basketball tournament.

Buffett said the idea for the contest was his. He said he was talking sports with Quicken Loans founder and Chairman Dan Gilbert in November when he pitched the idea to insure a $1 billion prize for a perfect bracket.

"I said, 'Here's a proposition that might be interesting to you,' " Buffett said in an interview with the Los Angeles Times. "It heated up three weeks ago. We quoted a price. They worked out the mechanics of it."

Quicken and Berkshire announced the contest Tuesday. It will be free and will be open to the first 10 million people who sign up online. If one person submits a perfect bracket, he or she will have the option of taking 40 annual payments of $25 million each, or a lump sum of $500 million. Multiple winners would split the money.

"This will be the most fun. Just imagine if there's one person left (with a perfect bracket) at the last game," Buffett said. "I will go to that final game with him or her, and I'll have a check in my pocket. ... I think we'll be rooting for different teams."

Buffett said one of his insurance companies is writing the $1 billion policy in exchange for a premium, which neither he nor Quicken would disclose.

He said the deal is not that different from many other insurance transactions his companies conduct. He evaluated the potential risk and then set a premium that gives him an edge against the probability of having to make a payout.

"We own Geico. We insure 10 percent of all the cars in the United States. You evaluate the risk and you charge a premium of what you think is appropriate. Overall, if you're pricing it right, you should end up with a profit."

Duke University mathematics professor Ezra Miller estimated that even a skilled sports handicapper had about a 1-in-1 billion chance of correctly guessing all 67 winners. So if 10 million experts entered the contest, Buffett would need to charge a premium of about $10 million to break even against his expected results.

"If I were Warren Buffett, anything over $10 million, I would probably do it," Miller said. "If $1 billion were going to ruin me, I wouldn't. But it's not going to ruin Warren Buffett.

"If he has to pay out $500 million, sucks to be him. But for the most part, it's pretty much a free $10 million. It all comes down to calculations."

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Buffett said his company is big enough to survive such a hit.

"We've lost more money in a given event before," Buffett said. "Hurricane Katrina probably cost us $3 billion."

"We will put more at risk in a given insurance transaction than anyone in the world. But we have more capital than anyone in the world," he said.

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."

He said that Quicken will run the contest, but Berkshire will be in charge of security.

"One of the things you do in a contest like this is evaluate the chances of someone gaming it in some way," Buffett said. "In terms of the security, that will be our job. It's their contest, but we have to be sure it's secure. There's a long history of people trying to make sports bets after the game is over."

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