- March 31, 2018
- Posted by: Hank Berkowitz
- Category: Uncategorized
In Part 1 of this post, Evan Powers CFP® author of myFinancialAnswers, observed that filling out your brackets is a lot like constructing an investment portfolio. “You’re trying to find the balance between the ‘safe’ picks (top seeds, blue-chip stocks) and the ‘upset’ picks (lower seeds, growth stocks); crafting a ‘unique’ bracket that you think can outperform your coworkers (or ‘the market); even making picks that will make us feel good when they work out well (picking our alma mater’s team, or values-based investing).
As we head into tonight’s national semifinal games (aka The Final Four) it’s clear that none of the tens of millions of people who filled out their brackets every year can consistently crack the code. Sure two of the four survivors were heavy favorites going into the tournament (#1 seed Villanova and #1 seed Kansas), another was decently respected Michigan (a #3 seed) and the fourth? Loyola of Chicago, an unheralded #11 seed which hasn’t won the tournament since 1963.
It’s so difficult to pick all 67 games correctly in this 3-week long single elimination tournament that investing icon, Warren Buffet once offered a $1 billion prize to anyone who could do it. Out of more than 10 million entrants, exactly ZERO were successful.
The old saying, “Past performance is no indicator of future results,” applies to the hardwood as much as it does to Wall Street. In fact, there are many parallels between human fallacies in finance and human biases around the annual NCAA basketball tourney. “Investing and gambling share multiple biases such as recency bias in which gamblers believe teams that did well for them in past years will continue to do well in 2018,” explained Matt Topley, a former college basketball player and currently, chief investment officer of Valley Forge, PA-based Fortis Wealth, just a long inbounds pass down the road from Villanova. “Investors believe that stocks or funds that did well recently will continue to do well going forward. They believe this even though mountains of academic research is to the contrary,” added Topley.
Topley said another common shared bias is Overconfidence. “Who had pre-tournament favorite University of Virginia (UVA) getting knocked out of the tournament in the very first round?” asked Topley. Less than .01% according to CBS Sports, which provides automated bracket picking tools for millions of office pool players “Most pool participants have massive confidence is top-ranked teams or in their alma maters who qualify for the tournament without empirical evidence to support their case.”
Anchoring is another common fallacy known to affect millions of investors and NCAA Tournament pickers, said Topley. It’s the misguided belief that “Kentucky ALWAYS gets to the Final 8” or that “Kansas can’t win the big games” so why should this year be any different? Considering that star players often don’t stay more than one or two years at the elite programs these days, anchoring based on brand name or reputation is even more dangerous today than it was during the past.
“One of my favorite investing biases is herding and oddsmakers love it when the American public stampedes over itself herding into the same bets,” quipped Topley. “No one had top-seeded University of Virginia going out in first round, let alone getting blown out by UMBC. Vegas has been making money since 1931 because of the American public’s uncontrollable urge to follow the herd.”
Another Wall Street staple is the “Halo Effect,” explained Topley, a recent winner of the Philadelphia Inquirer “Influencer in Finance” award. The Halo Effect comes into play often when investors blindly follow the recommendations or investing choices of gurus such as Bill Gross and Warren Buffet. “If Bill or Buffet said so then it has to be right—except when it isn’t.
“We tend to create Gods among men within the investment world and gamblers do the same,” noted Topley. “It’s the same when iconic broadcaster and college basketball analyst Dick Vitale screams to the nation that Villanova will win it all….How could Dickie V be wrong? Topley suggested you read “Moneyball,” Michael Lewis’s bestseller about baseball analytics, “for proof that baseball gurus have been wrong for a century.”
Then of course there’s the fallacy of “getting back to even” a mental accounting trap that has plagued gamblers and investors alike for centuries. After losing so many bets in the first two rounds of the march madness tournaments (think a string of losing hands at the Blackjack table), “I am due for a win, so let’s double down to get back to even,” you tell yourself “In investing, as in life, holding onto your losers is an emotional death trap,” observed Topley “Investing and the NCAA bracketology are psychology games, not IQ games.
Whether investing, gambling, or just wagering a sawbuck in the friendly office pool, always check your emotions at the door.
TAGS: Matt Topley, Fortis Wealth, Busted Brackets, March Madness, Behavioral Finance, Evan Powers, Warren Buffet
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