Calcutta Pools Take March Madness Up a Notch
Calcutta is an auction-based way of picking winners in the NCAA tournament. Individuals or funds buy 100% ownership rights to teams in an un-capped auction format with these “investments” returning a certain % of the total pot. The payouts percentages are determined by how far teams progress in the tournament. Every team from the NCAA tournament is put up for auction in random order. (Although I suggest combining 13-16 seeds in each region to make the process slightly simpler — no one really wants to pay for North Carolina A&T.) The highest bidder gets ownership rights of that team. This is the best part of the process. If you like a team, they're yours if you want them. You, and no one else, ride or die based on their performance.
Depending on whether you're doing this among friends or coworkers, you may decide to go at this alone or form a group to pool your money and buy a portfolio of teams. It's probably best not to have more than 10 entries into the Calcutta. The finance gurus out there might want to look into developing some type of model to predict the relative value of each team — i.e. North Carolina is worth $10, but Duke is worth $20. But most of the fun comes in not being completely sure what the total pot will be, so you'll have to estimate other owners' spends to figure out what each team is worth. There's also the possibility to trade all or part of your team in a secondary market after the initial auction wraps up.
The truest way of doing a Calcutta is to make spending unlimited. The market regulates itself because payouts are a percentage of the total pot. If one guy wants to go out there and spend enormous sums of money on high seeds, but no one else is bidding that high, then that's up to him. That person puts more risk on themselves. If they're the only one putting the majority of money into the pot, they're only getting their own money when the payouts come back, so there's no return. If upsets happen, that person is really screwed.
For those faint of heart, you can put in a couple restrictions to spending if that's too much for you to handle. I'd suggest a salary cap or luxury tax at $200. (For tax purposes, it would be $1 for every $1 spent over $200. If you spend $250 in the auction, it'll really be $300 because that extra $50 will be taxed $50 for each dollar spent.)
A suggested payout structure would look something like this: (Payouts are a percentage of the total pot – play-in games don’t count)
- · 0.50% for exactly 1 win (16 teams)
- · 1.75% for exactly 2 wins (8 teams)
- · 4.25% for exactly 3 wins (4 teams)
- · 12% for exactly 4 wins (Final Four losers — 2 teams)
- · 15% for exactly 5 wins (National runner-up — 1 team)
- · 22% for exactly 6 wins (National Champion — 1 team)
As an example to illustrate the process, let's pretend there are 6 owners/funds. You estimate that the 6 total owners/funds will spend $500 each. (Too rich for your blood? Divide by 10, or 2, whatever.) Therefore if you want Louisville, it's worth knowing they'd return $360 (12% of a projected $3,000 pot) if they make the Final Four and $660 if they win it all. Since you need some return on your investment, you likely won't want to spend that much more than $360 on Louisville. If you spend too close to $660, you are barely getting any return.
After the auction finishes, let's say there was actually $3,200 spent (not the estimated $3,000). You own Louisville and they win the whole thing, so you get paid out $704 (22% of the actual $3,200).
This may be a little complicated for some, but it's really worth the fun. Take a test drive with your friends and keep the dollars low if you are a little unsure of the process. You'll be thanking me on April 2.