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Now that's a business model

Carl Bialik attempts to pin down the probability of picking a perfect bracket in an NCAA tournament pool. He gets help from math profs at Cal Tech, Penn, and NYU, but to say this sharpens the estimate overstates the case. Carl's naive coin flip model yields odds of 1 in 9 million trillion. The math profs' estimates range from one in 2 billion to one in 250 billion. Who was it that said economics is imprecise?

Still, all modelers agree that the probability is really really small. This fact has emboldened companies to offer seemingly large prizes to anyone who enters the perfect bracket:

Papa John's is dangling one million pizzas. America Online is offering $1 million. Gambling site has put up $10 million, and says it may offer even more money next year.

But they aren't that bold. Non-bookie firms (presumably AOL and Papa John's) insure against this miniscule risk, presumably on the principle that they don't bet the company on an advertising gimmick. They purchase insurance from a Dallas company, SCA Promotions.

SCA, founded by 11-time world bridge champion Robert D. Hamman, has taken on the insurance risk for roughly 50 perfect-bracket prizes -- including a Sporting News offer of $1 million in 2001, according to vice president Chris Hamman, the founder's son. In the 12 years it has been doing so, SCA has never had to pay out a claim. Mr. Hamman declines to disclose the fee structure for these risk-transfer contracts, but says, "It's pretty normal for sponsors to spend about 2.5% of the prize value. If it's a large enough prize, [the percentage] could easily go up." (Sportsbook, for its part, says it hasn't bought any insurance to hedge its $10 million offer.)

Mr. Hamman says he has had inquiries from companies eager to launch similar contests for this summer's World Cup. The soccer tournament features 48 games and three possible outcomes -- win, lose or tie -- for the first 32 games, making it even harder to perfectly predict than the college-basketball tourney. He compares the odds of having to pay out for the basketball or soccer tournaments to a local bar's promotion that SCA once insured, offering cash prizes if, on a given day, aliens landed in the bar's parking lot or Elvis showed up.

SCA, it seems, has found a license to print money.

Hat tip: Pablo Halkyard.

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