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?