The Brilliant Market Psychology Of The Quicken Loans Bracket With Warren Buffett

I’ve spent the past hour in awe of the excellent marketing during the first four days of “March Madness” done by Quicken Loans with their “billion-dollar” promotion that has gotten a lot of attention since this past Thursday. For people who are interested in Charlie Munger’s mental models and love to study how psychology affects society’s perception of things, the Quicken Loans billion-dollar bracket gives us a lot of lessons.

First off, it plays to people’s basic notions to think in terms of “larger reward must be better” rather than calculating the expected payoff of something. Sure, the ultimate reward is $1 billion if your bracket is perfect, but you have to adjust it for the fact that the odds of getting a bracket right are 9.2 quintillion to 1 (actually, your odds are a little better than that because the quintillion figure assumes that every team has an equal probability of beating each other in any given round, whereas the reality is that you can get some mileage out of always assuming that the 1 seeds will beat the 16 seeds and the 2 seeds will beat the 15 seeds). Of course, all it takes is a Mercer win here, a North Dakota State win there, and a Dayton “Sweet Sixteen” appearance to screw up 99% of people who participate in the exercise (on a personal note, this was an exceptionally poor year for my bracket. It’s hard watching the SF Austin-UCLA game with friends, and upon getting asked who I picked to win, answering “VCU”).

For those of you who do train yourselves to think in terms of expected payouts, you can actually use the knowledge to make your life a little better along the way. Imagine you’re applying for college soon or have a kid that’s applying for college soon. Most people, when searching for scholarships, only focus their attention on the full-ride and half-tuition scholarships that are available. But the expected payoffs for things like that are atrocious—you have hundreds, maybe thousands, of students applying for a dozen scholarships. That’s not stacking odds in your favor.

A much better approach is to spend some time on, where it’s common to find $500, $1000, and $2500 scholarships that only get two or three applicants. The payoff is so much better there; if you spend two weeks of your life churning out 500 word essays, you could easily find yourself paying for a year’s tuition at your state school by accumulating a dozen $500 and $1,000 scholarships. It’s hard to find 17 year-olds out there that are thinking strategically about expected payoffs of their actions, but if you can knock a good habit or two into their heads, you can change their lives.

Secondly, it’s brilliant information gathering on the part of Quicken Loans to sponsor this bracket. They now have access to your name and basic contact information if you competed the billion-dollar bracket and answered their questions honestly. Basically, they paid $10 million to Warren Buffett (to ensure against the risk of someone actually filling out a billion-dollar bracket), get to build up name recognition with the country while associating themselves with an event that is immensely popular, and they got a whole lot of information for only ten million.

Which brings me to the third thing that Quicken Loans did intelligently—they chose Berkshire Hathaway to be the insurer of the deal. That was very intelligent—Warren Buffett is a popular figure, and they are able to latch themselves onto his reputation. Imagine this hypothetical world: Who are the most unpopular rich people in the country right now, the Koch brothers? Imagine if they had an insurance outfit and Quicken Loans contracted them to insure against the billion-dollar bet. The headlines would be blaring, “Billionaire Brothers Make $10 Million Off The Common Man” or something to that effect. It would be a PR nightmare.

Quicken Loans really knew what they were doing with this one. By making the terms a “perfect bracket” rather than the best bracket, they are able to make sure that it’s virtually impossible anyone will ever win, while playing into the natural psychological enticements that billion-dollar payouts bring. Meanwhile, they chose Warren Buffett to be the insurer, and they are able to trade on his good will reputation as well as the positive mental associations that we have with March Madness. Also, even if that one in quintillion chance happened and Warren Buffett had to pay out, he could handle the worst case scenario without a sweat. Since March Madness began last Thursday, Berkshire stock increased over 1.5%, which raised Warren Buffett’s net worth $1.2 billion. Even if he had to pay out the $1 billion, his net worth still would have been $200 million higher than it was at the time he made the bet.

Originally posted 2014-03-24 01:24:34.

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One thought on “The Brilliant Market Psychology Of The Quicken Loans Bracket With Warren Buffett

  1. scchan_2009 says:

    Interesting, I almost feel you are talking about the philosophy behinds statistics (laugh). It is the mental model in understanding what the PE and DCM really means. The current PE gives an estimate what type of DCM needed to justify the PE. Future earning is generally hard to predict, but probably can be conservatively estimated (i.e. the real “expected value” for future earning and growth). Yet quite a bit of the folks out there are very aggressive in their estimates for future earnings that out of reasonable expectations unless something wonderful can keep going for long time (hyped up expectations).
    Anyway, as Benjamin Graham said, Mr Market has wild mood swings (crazy expectations); it is best to stay far and away.

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