Playing the Odds with Warren Buffet

March Madness is nearly here… with the brackets ready to be set this Sunday night after the last of the conference tournaments wraps up; and as you have no doubt heard – there’s a little extra incentive to fill a bracket out this year in the form of Warren Buffet, one of the world’s richest people, offering $1 Billion (with a B) for filling out the perfect bracket (64 for 64). Talk about a bet with an asymmetric payoff and the chance for an outlier gain; this is just the kind of long gamma-type strategy managed futures yearn for…

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I’m sure there are a few quant teams crunching numbers right now, and Nate Silver is launching his new Five Thirty Eight blog in concert with the tournament by releasing some brackets (what if he won…a hedge fund would pay him $5 Billion to come on board…); and those in our office will surely be filling out some sheets – but what are the odds of landing this $1 Billion.

Depending on how you equate your chances of winning, you are 500 times more likely to win the jackpot lottery, then winning Buffet’s challenge. Business Insider provides a great explanation of your probabilities.

“If all of these brackets are equally likely — if each game in the entire tournament is a 50-50 tossup, and picking the winner is basically a coin flip — we then get the odds of a correct bracket at one in 9.2 quintillion.

Of course, flipping a coin 63 times is probably not a very good strategy for deciding how to fill out your bracket. Most of the games are not 50-50 matchups.

Consider the first round (the round of 64) of the NCAA Tournament.  Of the 32 games in the first round, there are four games in which four of the best 64 teams (1st seeds)  play four of the worst 64 teams (16th seeds).

Since 1985, when the tournament first expanded to 64 teams, no 16th seed has ever beaten a 1st seed in the round of 64.

If we’re comfortable assuming that this trend continues, we can safely fill in the four 1st seed vs. 16th seed games on our brackets.

Now we have 59 games to pick, and if we flip coins for all those, we have a one in 259, or about one in 576 quadrillion, chance of winning the tournament. Still pretty terrible odds, but by making this one assumption, we have boosted our chances by a factor of 16.”

If those numbers don’t compute for you, consider that no one in the history of 10s of millions of people filling out 100s of millions of brackets has ever correctly guessed all of the games, ever (at least not anyone who has been entered in an official pool). Consider that over 13 years of ESPN offering a bracket challenge, they’ve seen only ONE perfect First Round.

All in all, this is mostly a publicity stunt. And despite all the press, it really isn’t Buffet paying out the money; he’s actually insuring QuickenLoans payout of $1 Billion, and no doubt collecting some sort of insurance payment from them ($100, $100k?) to do so… talk about an option seller.

But it sure would be fun to see someone get really lucky and win… or at least get past the first round – where you could start to employ some hedging techniques and head to Vegas to spend a few hundred thousand on bets which if you lost… would mean that much greater odds of winning the billion. Or imagine someone actually getting to the final game…. Talk about a win/win – he or she could bet $100million on the team not picked in the bracket, and if the bracket is perfect, win $1 Billion. If not, win $100 million.

P.S. Here’s where you can enter Buffet’s Bracket Challenge.

P.P.S. If you just can’t get enough of Warren Buffet, he was on Late Night with Seth Meyers last night.

 

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Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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