This is not a bug, this is an essential feature. This effectively generates matching funding, and thus multiplies the amount of money and effort spent on a problem.

It is hard to figure out which idea works best; some inevitably won't work out and result in a loss -- but in this case much of the loss is covered by outside investors (including those investing their own time), competing with each other for the prize.

Also, I would trust people putting their own money down more than a grant committee, and people in general tend to be far more efficient when trying to beat competition, not when working on a set project.

Also, a smart graduate student is likely to be better at producing research, not at writing grant applications. Let the results speak for themselves.