Whether your Final Four picks include Blue Chip mega-caps (Duke, Michigan and Kentucky), or low-cap growth stocks (High Point, Cal Baptist and Prairie View A&M) behavioral biases are on full display when tens of millions of Americans fill out their NCAA men’s basketball tournament brackets.

March Madness is not just a three-week basketball-palooza. It is a classic example of the cognitive biases that derail investors year after year.  Here are four of the most egregious ones:

1. Overconfidence Bias

Ask anyone why they picked a certain team to go deep in the tournament and you will get a confident, well-reasoned answer. They watched three games this season. They read a column about the point guard. Their cousin went to that school. The coach is hot right now. They did well last year.

This is overconfidence bias in its purest form — the tendency to overestimate the accuracy of our predictions based on thin or anecdotal evidence. Behavioral economists have documented this bias extensively. Behavioral psychologist, Daniel Kahneman, described how people consistently overestimate the precision of their forecasts, especially in complex systems with many interacting variables.

Basketball, like markets, is exactly that kind of system. A star player rolls his ankle in warmups. An underdog catches fire from three. A referee misses a call. The outcome is partly skill and partly chaos — and yet tens of millions of people fill out brackets with supreme conviction. Yet no one has ever predicted all 67 games correctly in the same year. In fact, out of 36 million brackets completed on the major online sites in the 2026, NOT ONE bracket remained perfect by  the 44^th game of the 67 game tournament. And there are still four rounds to go.

Investors do the same thing. We read a few earnings reports, catch a segment on financial television, and proceed to make high conviction bets on individual stocks. We forget that we are competing against professionals who do this 12 hours a day with resources and computing power we cannot imagine. The bracket reminds us: confidence and competence are not the same thing.

For many years, Warren Buffett offered $1 billion to anyone who could pick a perfect NCAA bracket and never once paid up. Now Kalshi, the prediction market site is made the same $1 billion offer. They already know they won’t have to pay up in 2026.

2. Recency Bias: Why Last Year’s Champion Gets Too Much Love

In bracket psychology, recent events loom far larger than a full body of evidence would justify. The defending champion University of Florida Gators were a No.1 seed in this year’s tournament and a heavy favorite to make the Final Four. Instead, they got knocked out by No.9 seed, University of Iowa in only the second round. University of Nebraska started the season 20-0 and then dropped seven of their last 13 games heading into the post-season. They fell to a No.4 seed and millions of bracketeers overlooked them as a contender. Yet here are the Huskers in the Sweet 16 having just knocked off Vanderbilt, champions of the highly competitive Southeastern Conference.

Recency bias is equally destructive in investing. When markets are rising, investors pile in, assuming the good times will last indefinitely. When they correct, panic selling takes over. We let the last six months of data override twenty years of historical context.

The data on this is sobering. Dalbar’s annual Quantitative Analysis of Investor Behavior consistently shows that average investors dramatically underperform the indices they invest in — not because the funds are bad, but because investors buy high and sell low, chasing recent performance. They are filling out their financial brackets based on last week’s box scores.

3. Confirmation Bias: Rooting for Your Pick to Be Right

Once you have committed to a bracket pick, something strange happens. You start finding evidence that supports it everywhere. TV analyst Charles Barkley calls your team a “sleeper to watch” and it feels like vindication. But when pundit Seth Greenberg questions them, you instantly dismiss his take on your team, even if his argument is stronger. You are no longer evaluating information objectively — you are prosecuting a case for your predetermined conclusion.

Confirmation bias is one of the most dangerous land mines in investing. Once we own a stock, we unconsciously filter news through the lens of ownership. Good earnings confirm our genius. Bad news gets rationalized as temporary. We stop asking “should I own this?” and start asking “why should I continue to own this?” — a subtle but devastating shift.

Before you finalize a bracket pick, read the case for the other team. Before you double down on a position, write out a serious bear case. The goal is not pessimism — it is intellectual honesty.

4. Loss Aversion

Research suggests most people feel the pain of the loss roughly twice as intensely as the joy of a gain. Kahneman called this “loss aversion,” and he showed it is hardwired into our brains from birth.

In March Madness, loss aversion drives people to pick favorites relentlessly, even when the expected value of an upset pick is higher. We protect our bracket’s survival rather than optimizing for winning the pool. We anchor to our initial picks long after they should be reconsidered.

For investors, loss aversion leads to holding losing stocks far too long — hoping to “get back to breakeven” — and selling winners prematurely to lock in gains. Both behaviors sacrifice expected returns in service of emotional comfort. The result is a portfolio shaped more by feelings than by fundamentals.

How March Madness Can Make Us Better Investors

The most successful bracket players — and investors — share a few key traits.

1. They diversify their picks rather than over-concentrating on one narrative.

2. They respect base rates: historically, No. 1 seeds win the national championship more often than all other seeds combined. They manage their downside and stay in the game long enough for their process to pay off.

3. They also know when to trust the structure over the story. The tournament bracket is a process. A well-constructed investment policy statement is a process. Both exist to protect us from ourselves in high-emotion moments.

Before you submit your next bracket or make your next investment decision ask yourself: ”Am I making this pick because the data supports it, or because I watched them play two weeks ago and they outplayed their conference rivals with a better record? Am I buying this stock because I have a thesis, or because everyone on my feed is talking about it?”

Conclusion

March Madness lasts three weeks. The behavioral biases it exposes can last a lifetime. The court just makes it more obvious than a brokerage account does.

#Marchmadness, #NCAAbasketball, #behavioralbias, #investing

When thoughts turn to beaches, beer, barbecues and baseball over the three-day Holiday weekend, it’s easy to lose sight of what Memorial Day is all about. We’ve retail-ized the last weekend in May into the official “kickoff to summer” celebration. In reality, we’re supposed to be honoring U.S. military personnel who have died serving in the armed forces.  Let’s keep that in mind before we get too wrapped up in our social/shopping plans and cursing the sky high gas prices and traffic we’re enduring.

Speaking of perspective, suppose you had a recently retired client couple who finally took that round-the-world trip they’ve been planning for years. Let’s say they departed on Memorial Day 2021 and just came back this weekend, having not checked the news or the Internet during their lengthy sojourn. Looking at their financial statements for the first time in a year, it would probably elicit a yawn, not fear.

How can that be? Check out the chart below: Memorial Day weekend 2021 the S&P 500 was at 4,204. After the close of markets Friday, the S&P was essentially the same: 4,158.

As recently as two weeks ago, this headline came across my newsfeed from a reliable source: The S&P 500 is having its worst year so far in six decades. But, despite all the fear, anxiety and anger these screaming headlines provoke, the markets really haven’t moved much in the big picture. The S&P is essentially unchanged over the past 12 months. What’s more, it’s up a respectable 51% over the past three years (Memorial Day 2019) and up a healthy 72% over the past five years (Memorial Day 2017).

Last week the market danced around bear market territory, defined as a 20% or greater decline from a recent market peak. According to Dimensional Fund Advisors data, there have been at least 15 separate times over the past century when stocks have plummeted 20% or more after setting a recent high. On average, the markets have gained 69.9% five years after hitting bottom. Not too bad.

No one can honestly predict what the next six, twelve or twenty-four months will bring, nor can they explain with confidence how we got to where we are today. Sure, all the doom and gloom predictions about rates hikes, inflation and a recession will be painful in the short-term, but we always find a way to get through those headwinds.

Here’s a prediction from your favorite marathon-running editor: “Slow and steady always wins the race.”

Conclusion

Keep the faith. If you or someone close to you is in the military, we sincerely thank you for your service.

Enjoy your Holiday weekend.

Best, Hank B

Don’t agree? Tell me why.

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Last week’s post about the record high “Quit Rate” of American workers generated a fair amount of feedback. Some said “it’s about time” that workers finally gained some leverage over greedy employers, but the majority questioned the wisdom of workers flexing their bargaining muscles at this stage of the economic cycle. They said it was irrational exuberance at best, foolhardy at worst, particularly for younger workers who haven’t been through a full economic cycle before.

Speaking of irrational exuberance, several of our clients have been interviewed in the national media about whether our economy and financial markets are heading into bubble territory.

Dr. Guy Baker, CFP, Ph.D founder of Wealth Teams Alliance (Irvine, CA) said a bubble occurs whenever one sector of the economy is doing much better than would be expected if it were not for a few specific factors in play. “The dot-com boom became hyperextended because more and more dollars were flowing into companies that had no viable economic record,” added Baker a member of the Forbes 250 Top Financial Security Professionals List and author of The Great Wealth Erosion, Manage Markets, Not Stocks and Investment Alchemy. “The gold rush mentality drove the urgency to not lose out. As a result, the value of Internet companies soared and became a bubble,” observed Baker. “When the bubble popped, only the strong survived. When we look at bubble thinking today, the only real bubble driven by economics is cryptocurrency,” he added.

Regulatory bubble

While some readers also pointed to meme stocks like GameStop, non-fungible tokens and the boom in SPACs, Baker said he is more worried about another type of bubble that most folks aren’t paying attention to – the government regulation bubble. “We saw this in 2009-2010 when the government caused disfunction in the mortgage market,” explained Baker. “Homebuyers were able to qualify for mortgages based on nothing more than their signature and a statement of ‘fact.’ The free money came home to roost when the economy slipped, and these homeowners walked away from the houses leaving the lenders with an empty house and an inflated value,” he added.

Baker maintains that economic bubbles are part of the capitalistic system, and usually isolated to the companies affected, but regulatory bubbles are not. “They are dangerous and can cause huge damage to institutions and businesses,” he added.

So, how can investors protect themselves from speculative investments related to economic bubbles?

The best way to protect yourself is through wide diversification, advised Baker, adding that in a “well-balanced, smart portfolio” most of the companies that would be “disasters when a bubble burst” will not be included in the mix. He prefers ETFs and mutual funds that are well diversified. “It’s important not to buy funds that do the same thing,” said Baker. “Also, stay away from funds that say one thing and do another. Low turnover is a key metric to watch. Low turnover means the portfolio managers are making good choices and sticking with them. High turnover suggests the fund is chasing yield.”

Five stages of an economic bubble

In his landmark book Stabilizing an Unstable Economy (1986), economist Hyman Minsky identified five stages in a typical credit cycle which follow the typical stages of an economic bubble:

1. Displacement. Investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low.

2. Boom. The asset in question attracts widespread media coverage. Fear of missing out (FOMO) on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of investors and traders into the fold.

3. Euphoria. Caution is thrown to the wind, as asset prices skyrocket. Valuations reach extreme levels during this phase as new valuation measures and metrics are touted to justify the relentless rise. The “greater fool” theory plays out—the idea that no matter how prices go, there will always be a market of buyers willing to pay more.

4. Profit-Taking. Believing the bubble is about to burst, the smart money starts selling positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise.

5. Panic. It only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot be reinflated. In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate at any price. As supply overwhelms demand, asset prices slide sharply. Think the early days of COVID or the 2008-09 global financial crisis.

Most think we’re somewhere between Euphoria and Profit-Taking. But, as economist John Maynard Keynes famously said: “the markets can stay irrational longer than you can stay solvent.”

What’s your take? I’d like to hear from you.

Conclusion

As billionaire value investor, Seth Klarman likes to say: “At the root of all financial bubbles is a good idea carried to excess.” Or as Warren Buffett always says: “Be fearful when people are greedy and be greedy when people are fearful.” I’m not sure whether we’re in a bubble or not, but like most things in life, the truth usually lies somewhere between the extremes.

#economicbubble, #irrationalexuberance, #investing, #diversification, #GuyBaker