Why Skill Never Prevails in Your March Madness Pool:
2015 Update


This is an update to our article last year, contributed by David Gimpel and Matt Zerker, our resident NCAA fans.

Last year on Gestaltu, we published an article about the various flaws of the conventional March Madness office pool.  It’s a fun piece, and if time permits we recommend a full read, but the major flaw with traditional pool rules boiled down to small sample size.  At the time, we wrote:

Adopting the standard bracket rules is undesirable because every incorrect choice has the effect of reducing the sample size upon which we judge the best picker.  These incorrect picks stay on your bracket as legacy errors, eliminating every subsequent game from the set upon which you are judged.  This reduces the sample size, and in the world of statistical reliability, smaller sample sizes increase the randomness of possible outcomes.
We then went on to suggest a series of fixes (inverse odds scoring, eliminating legacy selections, and not overweighting later rounds) that would be nearly impossible for a bracket manager to implement, and more importantly, would kill a lot of the excitement.  In this post, we intend to rectify those errors by suggesting a fundamental change to the entire bracket system.
Specifically, this year, for our own office pool, we’re going to do an auction. Yes, before the tournament starts, we’re going to have an auction wherein participants will each have a fixed budget and will be able to bid on teams. Whoever “owns” the team that wins the tournament wins the pool. Period.
Economists and investors love auctions.
As Investors, we are keenly interested in this method because it has implications for diversification and portfolio design.  Am I better off buying two #1 seeds or three #3 seeds or every seed worse than #6?  Would I be better off with two #1 seeds from different regions or the #1-3 seeds in a single region?  What are the relative values between teams?
As Economists, auctions represent a microcosm of the broad theory of supply and demand.  Though we didn’t consider it last year, an auction solves a lot of the problems involved in a traditional bracket because unknowns and risks are all baked into the initial auction price required to “own” a team.  This eliminates many of the in-tournament considerations; Legacy picks, as an example, become completely irrelevant because at all times, every team remaining in the tournament is owned by someone.  Furthermore, there are strategic and behavioral aspects that could play into team prices:
Oh, so Dave attended University of Wisconsin and therefore has loyalty to the Badgers?  I wonder how much he’d overpay to own them…
This only adds to the excitement of the pool because – unlike the traditional method where it’s possible for everyone in the pool to be rooting for the same team – in the auction method only one person is rooting for any specific team to prevail.
Last year, we addressed the excitement aspect of March Madness pools, writing:

As with picking an NCAA Tournament bracket, the hope in all endeavors is that true skill bears out over time.   In the investing world, time is our sample size.  Any manager can look like a genius over a year or two, but it is the truly talented ones whose ability bears out over much longer and more significant periods of time.  We want the odds on our side as often as possible, and we want the rules of the game to reward those with a true informational edge.  Understanding the virtuous-spiral-inducing recipe of large sample size, statistical robustness and compound growth, we’re happy to win thousands of small bets over our investing lifetimes even if the “action” in the interim isn’t nearly as thrilling.  Indeed, the recipe for long-term success is to be on the proper side of a small win over and over again.  If you’re excited about your investments – even if it’s for the right reason, like great performance – you may want to think twice about whether or not that strategy is appropriate for you, since the investment’s evocative nature stands a good chance of undermining your success down the line.

In the world of NCAA March Madness brackets, however, we are more often excitement-seeking.  And that’s quite problematic to our goal of identifying the best picker, because even we must admit that in the case of March Madness brackets, excitement adds to our overall enjoyment even when it diminishes our chances of winning.

An auction has the potential to serve a dual purpose: not only does it do a better job of establishing skill versus luck (at least when compared to the traditional methods), but in addition to that we enhance the glory of just destroying your colleagues.
And isn’t that what office pools are really about?

Disclaimer

Confidential and proprietary information. The contents hereof may not be reproduced or disseminated without the express written permission of ReSolve Asset Management Inc. (“ReSolve”). ReSolve is registered as an investment fund manager in Ontario and Newfoundland and Labrador, and as a portfolio manager and exempt market dealer in Ontario, Alberta, British Columbia and Newfoundland and Labrador.
These materials do not purport to be exhaustive and although the particulars contained herein were obtained from sources ReSolve believes are reliable, ReSolve does not guarantee their accuracy or completeness. The contents hereof does not constitute an offer to sell or a solicitation of interest to purchase any securities or investment advisory services in any jurisdiction in which such offer or solicitation is not authorized.

Forward-Looking Information. The contents hereof may contain “forward-looking information” within the meaning of the Securities Act (Ontario) and equivalent legislation in other provinces and territories. Because such forward-looking information involves risks and uncertainties, actual performance results may differ materially from any expectations, projections or predictions made or implicated in such forward-looking information. Prospective investors are therefore cautioned not to place undue reliance on such forward-looking statements. In addition, in considering any prior performance information contained herein, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that results comparable to those discussed herein will be achieved. The contents hereof speaks as of the date hereof and neither ReSolve nor any affiliate or representative thereof assumes any obligation to provide subsequent revisions or updates to any historical or forward-looking information contained herein to reflect the occurrence of events and/or changes in circumstances after the date hereof.

General information regarding returns. Performance data prior to August, 2015 reflects the performance of accounts managed by Dundee Securities Ltd., which used the same investment decision makers, processes, objectives and strategies as ReSolve has used since it became registered and commenced operations in August, 2015. Records that document and support this past performance are available upon request. Performance is expressed in CAD, net of applicable management fees. Indicated returns of one year or more are annualized. Past performance is not indicative of future performance.

General information regarding the use of benchmarks. The indices listed have been selected for purposes of comparing performance with widely-known, broad-based benchmarks. Performance may or may not correlate to any of these indices and should not be considered as a proxy for any of these indices. The S&P/TSX Composite Index (Net TR) (“S&P TSX TR”) is the headline index and the principal broad market measure for the Canadian equity markets. The Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”) is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy.

General information regarding hypothetical performance and simulated results. These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account or fund managed by ReSolve will or is likely to achieve profits or losses similar to those being shown. The results do not include other costs of managing a portfolio (such as custodial fees, legal, auditing, administrative or other professional fees). The contents hereof has not been reviewed or audited by an independent accountant or other independent testing firm. More detailed information regarding the manner in which the charts were calculated is available on request. Any actual fund or account that ReSolve manages will invest in different economic conditions, during periods with different volatility and in different securities than those incorporated in the hypothetical performance charts shown. There is no representation that any fund or account will perform as the hypothetical or other performance charts indicate.

General information regarding the simulation process. The systematic model used historical price data from Exchange Traded Funds (“ETFs”) representing the underlying asset classes in which it trades. Where ETF data was not available in earlier years, direct market data was used to create the trading signals. The hypothetical results shown are based on extensive models and calculations that are available for any potential investor to review before making a decision to invest.