As I write this, we are in the early stages of March Madness. From my perspective, this means the NCAA wrestling championships, but clearly I’m in the minority – for most sports fans, it means basketball. Part of this event’s annual ritual involves filling out a tournament bracket that attempts to chart the outcome of every single game. People try to anticipate when a favored team will win as expected, and when an underdog can somehow knock off a top contender. The single-elimination format means that every game matters and adds to the overall excitement, since every year produces upsets and outcomes that are much closer than anyone expected. (Remember when 16th seeded Princeton nearly beat number 1 seed Georgetown in 1989?) Fans love the unpredictability even as they try to anticipate how the tournament will unfold.

Of course, by the time you read this, you’ll have a pretty good idea of just how on-target (or not) your bracket turned out to be. My guess is that most of us will find the results at least somewhat disappointing, with several “how could I have possibly picked THEM?!” or “I can’t believe they lost in the first round!” regrets. But instead of focusing on the results, I’d like to consider the different methodologies that people employ when actually making their selections. I suspect that the process used to complete a bracket could be indicative of a person’s decision-making process in general, and might even offer some hints about how they make financial and investment decisions. [And credit goes to my fantasy football partner Brendan for inspiring this idea.]

One way to fill out your bracket is to simply pick the higher seed to win in each game. That will give you the final four (each of them being the #1 seed in their region), and from there you can rely on national rankings to determine the winners. This method essentially cedes the selection process to the collective opinion of a few experts (i.e., the Selection Committee), and it has the appeal of putting the decisions into the hands of people who follow the teams closely and therefore should be able to judge them in an objective and informed manner. 

However, it doesn’t account for unpredictable (but not unheard of) occurrences such as a star getting into foul trouble or a team’s shooters suddenly missing their 3-point attempts. In a single-elimination tournament, an off game can mean the end of the road for that team.

People may also be impacted by a number of biases when making their selections. They might perennially over-estimate the talent of their local team or the school they attended. They may also be wowed by one or two star players (e.g., Danny Manning, Patrick Ewing) who they believe will carry their team all the way to the finals. Or they could fall in love with a team based on the eye test, one that just looks dominant or plays an exciting style (remember Loyola Marymount with Bo Kimble and the late Hank Gathers?). One way or another, they’re trusting their instincts and going with their gut, particularly if they see a team with certain traits that remind them of a successful champions from prior years.

Another approach is to rely heavily on statistics. Back when I used to fill out brackets, I was partial to teams that showed good scoring defense and free throw shooting. I reasoned that a team who could keep a game close and hit clutch free throws during the last few minutes stood a good chance of winning. Others might focus on shooting accuracy, turnovers created, scoring balance (in case a key shooter has a cold streak), average height, or a number of other potentially relevant metrics. They may reason that the numbers don’t lie and that their attempts at objectivity might help to overcome some of the biases in the previous paragraph. 

There are a couple of issues with crunching numbers, though. You need to determine which metrics actually matter, not just those that are spuriously correlated with good teams but not necessarily predictive. Also, the relevance of particular measures can change over time. For example, free throw shooting might not be as important if referees are letting teams play more and not calling as many fouls.

How might selection methods manifest in a person’s investment approach? 

I could imagine that a person who tends to choose the higher seed might be more likely to use an index fund, especially one experiencing heavy inflows. Or they might want to invest in a well-known balanced or global allocation fund run by a star portfolio manager. They could be uncomfortable with unfamiliar asset classes or a heavily contrarian approach. However, their desire to trust an expert’s opinion might indicate that they are more likely to buy and hold and not trade at the wrong time, which could serve them well during periods of market volatility.

basketballThose who go with their gut when completing brackets might be susceptible to making big bets. They may show a strong home-country bias, for example, or want to heavily overweight exposure to the sector or industry in which they work, assuming that their personal expertise will help inoculate them against beginner’s mistakes. Their reliance on the eye test could also tempt them to bet heavily on a company that looks like “the next Apple” or “the next Microsoft,” when they might actually be looking at the next (RIP).

Those with an eye for statistics may prefer quantitative “black box” managers that appear to have cracked the market’s code. Or they may have devised their own formula, often based on measures of earnings or price momentum. Such an investor might be inclined to trade more frequently, if signs emerge that leadership trends appear to changing. I can also imagine them potentially developing a myopic focus on a small number of specific metrics, perhaps overlooking broader challenges or issues. Enron reported some very strong growth trends, to cite an extreme example.

At the end of the day, whether we’re talking about completing brackets or picking stocks, no one ever gets it 100% correct. But basketball fans and investors alike often rely on certain heuristics or rules of thumb to help them make decisions. And the methods people use to make decisions probably reveal something about their personality, the traits that they value and focus on, and how they deal with uncertainty. So if you have a client who likes to fill out a bracket every year, why not ask them about their selection process? You might gain some valuable insight into their mentality as an investor, which could help you serve them even better.


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