The annual single-elimination national tournament of college basketball’s 68 best teams is usually filled with wild upsets, heart-wrenching losses and game after game going down to the final seconds in which your favorite team either wins or goes home (season over). No best of seven. No consolation bracket. No do-overs. If you’re a bettor, you need a balanced portfolio of heavy favorites, mid-major standouts and unlikely upstarts to come out ahead. Like the stock market, you just never know which name or sector will get hot at just the right time.
March Madness is the ultimate reality show in which on any given night unheralded Fairleigh Dickinson can end top-ranked Purdue’s season in the first round (2023). University of Maryland Baltimore County (UMBC) can end top-ranked Virginia’s season in the first round (2018). St. Peter’s, a tiny commuter school from Jersey City, NJ can send mighty Kentucky packing in the first round (2022) and then end Purdue’s season in the third round, or Florida Gulf Coast can knock out mighty Georgetown in the first round (2013).
This year’s tournament started out predictably unpredictable in the first round as little- known McNeese State knocked out Clemson; No.12 Colorado State beat No. 5 Memphis; and No. 10 Arkansas beat No. 7 Kansas and then No. 2 St. John’s. But, then the upset gods fell asleep at the wheel and went on vacation early. By the time we got to the Elite Eight teams, we had four No.1 seeds, three No. 2 seeds and one No. 3. Great teams all, but pretty “chalky” as the betting community would say. And not very exciting.
What March Madness teaches us about investing
Despite a more predictable than usual tournament, none
of the 34 million brackets filled out on the ESPN and CBS platforms
remained perfect after the first two rounds of the six-round tournament.
I bring this up because our collective inability to pick March Madness brackets successfully, despite all the data and analysis available to us free of charge and in real time, highlights many of the behavioral biases that so often derail our investment decisions.
Rory Henry, CFP®, BFA™, Director of Arrowroot Family Office and author of the new book Holistic Guide to Wealth Management, told me if you're looking at your bracket and wondering why you got your hopes up that a “Cinderella” run would bring back the madness, it's not your fault—"you likely fell victim to one (or many) of the psychological and emotional biases” such as those listed below:
- Narrative
Bias. “We crave stories,” said Henry. “The Cinderellas gave us
drama, hope, and belief in the improbable. Without them, we’re left with
stats and seedings—logical but less exciting. We’re wired to favor the
emotionally compelling over the rational,” he lamented.
- Recency
Bias. Last year’s upsets? “We expect more of the same,”
asserted Henry. “But just because it happened recently doesn’t mean it
will repeat. Our memories are short, and our expectations are often
misaligned with changing realities,” Henry added. Sound familiar
investors?
- Boredom Aversion is perhaps the
most overlooked bias according to Henry. “When things play out as
expected, we feel let down. We miss the chaos. We crave the underdog even
as we fill out our brackets with safe picks. Predictability feels less
human—and less fun.”
I might also add “Loss
Aversion” in which the pain of a loss is felt at least twice as acutely as
the joy of the gain. It doesn’t matter if you’re filling out brackets or balancing
your portfolio. Losses hurt….bad.
For more behavioral bias that derail or investing and bracket-picking plans, see
What
March Madness Teaches About Our Biases.
“March Madness has always
been about the irrational exuberance of college basketball fans,” noted Henry. “This
year, it’s teaching us a different lesson: that our love of drama, our reliance
on the past, and our resistance to predictability—and yes, our delight in
making irrational picks—are what made March Madness so fun in the first place. And
maybe, just maybe, we’re learning that true madness isn’t in the upsets—but in
how we process what happens when they don’t occur.”
From where I sit, this year’s lack of drama is likely to become the norm rather
than the exception, thanks to the Transfer Portal and the new NIL deals that
allow players to make money – in the seven figures for top players -- from the
commercial use of their name, image, and likeness.
“Talent,” said Henry, “is now clustering at big-name programs with deep pockets
and brand visibility.” I agree with Henry’s assessment that if you need a skilled
point guard, you no longer have to take a chance on 17-year-old high school
recruits and wait several years for them to develop in your program. You just
go to the transfer portal, search on experienced points guards, and reach out
to a proven fourth- or fifth-year player who’s looking for a bigger paycheck at
your school. They must no longer sit out a year in order to transfer and wonder
if boosters will make good on their under-the-table promises. It’s all out in
the open.
And that’s a shame. March Madness has long been the platform for the Weber States, Valparaisos, Gonzagas, Texas Westerns, Butlers, UMBC’s and St. Peters’ to gain national recognition and substantially boost donations and applications. It’s also a chance for the Yales and Princetons of the world to show they can hit the hardwood as hard as they hit the library. Auburn and Arizona learned that the hard way in recent years. Not so this year.
Conclusion
We need those scrapy startups to put the Mega Caps in their place from time to
time. Otherwise, we’re just mailing it in and not innovating or getting better.
What are you and your
colleagues doing to stay hungry and innovative? I’d love to hear from you.
#marchmadness, #innovation, #behavioralfinance
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