You are one of the winners in a casino drawing. This time, there were actually eleven winners. Ten of you will get $500 and one of you will get $10,000. All prizes are in cash.
Nine people have already made their selections — and all have picked $500 — many of them showing their disappointment. There are only two cards left. One for $500 and one for $10,000. You know the other winner and he leans over and asks if you want to make a save.
“What do you have in mind?” you ask.
“The guy who wins the big prize gives the other guy $3,000,” comes the reply.
So. Do you make this deal?
There are lots of different ways the save could have been structured. Through the years, I’ve been in this situation perhaps a dozen times. Sometimes I’ve taken the deal and sometimes I haven’t. Sometimes I’ve been the one suggesting the split. I’ve also witnessed others make this type of deal dozens of more times. Today I want to discuss what would make me say yes and what would make me say no.
Saves in general are a way to lower variance without affecting your expected win — this time changing the prize structure from $10,000 – $500, to $7,000 – $3,500. This is a preferable split to most players. But you need to be careful.
Here we’re assuming there are two players with equal chances. Tournament poker players sometimes use a so-called “Independent Chip Model” to deal with any number of players, each with different chip stacks. That’s way beyond what we’re discussing today.
First of all, do I trust the other guy? If the answer is no, I’ll decline the deal. If I’ve heard anything suggesting he’s not honorable, that’s a showstopper. A situation where I pay him $3,000 half the time but he reneges the other half is a lousy position to be in. If I’ve never seen this guy before, my default reaction is not to split.
Second, what about taxes? The one who collects $10,000 is going to receive a Form 1099 from the casino for that amount, meaning the IRS is going to want its share. Possibly the $500 winner will receive a 1099 too, depending on the casino. In today’s discussion, we’ll ignore whether the $500 winner will receive a 1099 from the casino.
The two most-common ways to handle taxes are for the winner to eat them all, or for the winner issue his own Form 1099 to the other guy. I can live with it either way, but I need to know in advance.
Lastly, and this isn’t always possible, I want a witness we both know and trust. If this is a weekly drawing at a local casino and both of us regularly enter the drawing, there are likely several others we know and trust to be a witness. If this is a drawing at a casino where neither of us have won before, finding that trusted third party will be tougher. One or both of you may know nobody else there. In this situation, I probably won’t know the other winner either and so my solution would be to skip the save.
There will not be time for a written agreement — signed and notarized. You’re going to have to go with a handshake deal. (Whether there’s a physical handshake or not is immaterial to the agreement between you being valid — but one or both of you might feel better if you actually do it.)
One time I got burned on this. The other guy’s wife got involved after the fact and vetoed the deal. She was adamant and a big scene in the casino would have had bad repercussions. I choose to believe that the guy made an honorable agreement and his wife came in and interfered. It’s possible, I suppose, that they regularly pull this as a sort of scam. Two years later the same guy invited me to split, and I declined.
That’s it. Congratulations on making it this far in the drawing! Hopefully, whether you’ve agreed to a split or not, you win the big prize!