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.
Oh, so Dave attended University of Wisconsin and therefore has loyalty to the Badgers? I wonder how much he’d overpay to own them…
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.