Buffett’s Wager
on Human Behavior
(Part 1)

If March Madness wasn’t already a national phenomenon, the stakes went even higher this year.  Everyone’s favorite billionaire investor, Warren Buffett upped the ante for the 2014 NCAA Men’s Basketball Tournament by insuring a $1 billion prize from mortgage lender Quicken Loans to anyone who correctly filled out a “perfect bracket.”  Quicken paid an undisclosed sum to Berkshire Hathaway, Buffett’s company, to backstop the payments in case someone hit the jackpot.  Depending on who you ask, the odds of such an event occurring are between one in 9.2 quintillion to one in 128 billion – give or take a few trillion!

Why did Berkshire and Quicken create the “Billion Dollar Bracket Challenge?”  Because, quite simply, they knew nobody would win.  And nobody did.  NOBODY EVEN CAME CLOSE.  The last three perfect brackets were decimated after Memphis defeated George Washington 25 games into the Round of 64 – or 37.4 percent through the tournament.  But we’ll bet dollars to doughnuts that of the 15 million Americans who signed up for the contest (the number of entries was capped at 15 million), many sincerely believed they had a chance to win.  Should these people be at fault? Of course not.  For one, it cost nothing to enter the contest.  Second, biologically speaking, our brains are hard wired to take on propositions that offer a very high payout, but a low probability for success.  It’s particularly true when there’s a minimal amount on the line – think lottery tickets.

When it’s all said and done, who are the winners and losers in this competition? It’s hardly fair to label anyone with an imperfect bracket a loser – particularly when they didn’t have to wager any money of their own.  In fact, when the tournament ends, the 20 entrants with the best “imperfect” brackets will each win $100,000 from Quicken.  Does that make Quicken the loser in this venture, given the undisclosed premium they paid Berkshire (in addition to the $2 million in prize money)? Not so fast – one can argue that Quicken will more than make up for their out-of-pocket expenses from increased brand recognition and the valuable data they collected from the 15 million people who signed up.  That’s right; each contestant was required to provide their name, address, email and birthday in addition to answering a few questions related to their home mortgage situation.  A nominal investment considering that most companies would kill for that many leads!

While it’s debatable who the losing party in this scenario was, there is no doubt – and no surprise – that Warren Buffett was once again the big winner.  When Buffett first concocted the idea for this competition, he certainly knew the kind of buzz and interest it would generate.  And given his avuncular personality, I’m sure he truly wanted people to have fun with it.  But he always knew that he had the upper hand. And that is exactly how he became such a successful investor – by understanding human behavior, focusing on the things he can control and tilting the odds in his favor.  That’s why you don’t bet against Buffett.

(Stay tuned for part two of “Buffett’s Wager on Human Behavior” where we will take a closer look at how this story relates to having a successful investment experience.)

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