Chris Wilson at Slate proposes what he imagines is a “hedge fund” strategy for choosing your picks for the NCAA brackets. His key insight is that the consequences of coming in dead last in an NCAA pool are no more severe than coming in just a few slots behind the top picker. Your risk is minimal and the reward can be great, so it pays to take gambles.
“Act as if you’re a hedge-fund manager in the good old days: Risk is your friend, and the consequences of making a bad bet are small,” Wilson writes.
The “contrarian” strategy I’m suggesting here isn’t new; correctly choosing upsets has always given pool jockeys a major boost. What’s changed in the last few years is our ability to value the risk and rewards of a given bet and to decide whether it’s worth it. This bracket-picking strategy isn’t so different from the way Wall Street became obsessed with modelling risk, as Wired recently chronicled. The key is having access to two data sets: the wisdom-of-the-crowds data from the national bracket and a table of more objective stats. By comparing the two, you’ll be able to assess whether you’re getting bang for your buck when you throw your lot in with an underdog team.
As you can tell, this is basically a statistical arbitrage bet. It assumes that temporarily over-rated teams will revert to statistical means of performance. Unfortunately, while this strategy might work over the long term you could lose for years and years before it paid off. If you get discouraged or run out of gambling money before the actual outcomes revert to those predicted by historical data, you could end up missing the one year you’d win. That means your obligated to keep playing the same strategy for the long run. And in the long run we’re all dead.
We think we have a better strategy. You should choose your brackets like a short seller. Instead of trying to pick winners, pick losers. Direct your analysis to detecting weaknesses within teams that have been overlooked by the fans. This may involve more work, including looking at the fundamentals of teams and paying attention to individual players, than stat arb but it also doesn’t depend on just crossing your fingers and hoping the bell-curve rings at the end of each game.
Amateur sports betting tends to have a long-bias. Fans know their own teams strengths and tend not to know as much about the weaknesses of their potential opponents. They may have a superficial view of the weaknesses but they are far less keen to pay attention to this than strengths.
This creates a market opportunity that you can exploit. If you are the one paying particular attention to weakness, you’ll have an insight others miss. Everyone else is picking winners. You are picking losers.
Let the quants try their same old game. We’re siding with John Paulson and Jim Chanos in our NCAA brackets.
PS: Yes, we know it’s a bit late for this advice. Like any good hedge funder, we kept our strategy secret until it was too late for you to use it. Clip & save for next year.
Business Insider Emails & Alerts
Site highlights each day to your inbox.