As March drags on two important events happen: the first day of spring and the NCAA March Madness Tournament. I found a fun article in the New York Times that connects the bracket from the tournament (over 11.5 million were made) to making predictions in the financial markets. The main connection is that people are rewarded for taking against-the-grain picks that pan out. It also shows the importance of overcoming biases to make sound investing decisions.
They wanted to see how the expectations of the readers who entered bracket differed from the other types of projections of the likely tournament outcomes. Their main question was “How do our readers’ forecasts compare with purely quantitative measures of the likelihood of tournament success?” All of the sources of the tournament projects were more or less similar, especially in dealing with who had the best chance to win it all (most people say Kentucky, I say Duke) and those who have the least likely chance to win it all (the number 16 seeds). “But the divergences that do exist are a fascinating study in cognitive bias, in particular the “familiarity heuristic,” or a tendency to overweight the value of that which is familiar to us.” This is why people are more likely to stick with what they have always done rather than analyze which offers the greatest quality for the price.
The article wraps up saying why some of the readers weigh some characteristics to the team statistics. The main three measures for these readers are:
- Based in the Northeast, which has the heaviest concentration of readers (St. John’s)
- Academically elite schools (Davidson and Harvard)
- Teams that have had recent success in the NCAA tournament (Butler and Wichita State) or a long track record of excellence (powerhouses like Duke, UNC, Kentucky, Michigan State, Kansas).
Granted this was a fun article the New York Times posted, but is there anything we can learn from this event?