How Investor Psychology Can Help You Win Your NCAA Tournament Pool

I'll admit upfront that I went to Penn State, where football is king and basketball is sometimes seen as the court jester. But I do know something about psychology and betting, and I wager a little of that knowledge will help you score better in your office NCAA basketball-tournament pool.

The psychology of gambling is all about mental glitches -- more properly called psychological biases -- that cause us to make mistakes. A mountain of research has shown that those biases cause us to miscalculate in everything from investing to driving to gauging how funny we really are. Recognizing them will help you fill out your brackets.

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The Hot-Hand Fallacy

In a 1985 study, researchers found that 91% of basketball fans thought that a player stood a better chance of making a shot after having made two or three baskets in a row. Players and coaches in the NBA likewise shared this belief. In reality, however, a player’s next shot is only as likely to drop as his overall shooting percentage would suggest. Ditto for a “hot” team on a winning streak.

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What it means for your bracket: Don’t bet that a team on a winning streak will carry that momentum through the tournament. For instance, stay away from Bucknell (10 straight wins) and Gonzaga (9 straight); let others in your bracket talk themselves into thinking the hot underdogs can overcome Big East powers Connecticut and St. Johns, respectively.

The Home Bias

We tend to invest in things we’re most familiar with, even when it makes no sense; the same is true for filling out your NCAA tournament bracket. This is supported by Bradley Carlin, a professor of statistics at the University of Minnesota, who has co-authored two papers on NCAA tournament probabilities. He’s been quoted as saying: “I live in a Big Ten town, so as a rule, the Big Ten is over-bet.”

In investing, the home bias is often extreme. For example: At one point during the 1980s, for example, Sweden's stock market accounted for less than 1% of the value of the world's markets. Nevertheless, most Swedes were 100% invested in Swedish stocks. And one study looked at investments in regional Bell holding companies (the "Baby Bells"). In all but one state, the study found, locals tended to hold more shares of the nearest Baby Bell than the others.

A particularly harmful home bias involves owning too many shares of your employer's stock. A 2001 study found that Coca-Cola employees allocate 76% of their discretionary retirement contributions to Coke shares -- and only 16% thought that such a big bet was riskier than a well-diversified portfolio.

What it means for your bracket: Don’t be overly enthusiastic about your alma mater’s prospects. Penn State made the 2011 tourney (hallelujah!), and my gut tells me they'll win the first couple of rounds -- after all, they played well enough in the recent Big Ten tournament to qualify for the NCAAs. But I know to disregard both the hot-hand fallacy and the home bias, and the reality is that Penn State is likely to fall to cross-state rival Temple in the first round.

The Herd Bias

Herd mentality, of course, is the tendency of people to follow the crowd. But you may not know just how powerful it is. Brain scans have shown that a crowd’s opinion actually changes our perception of a problem -- it literally alters our perception of reality. Further, going against the crowd stimulates the part of our brain that experiences pain.

What it means for your bracket: You have a better chance of winning it all if you pick a slight underdog to win the title. If you pick a top seed, and many others in your pool pick the same team, and it wins, you’ll have to beat plenty of office mates in the rest of the bracket. And while your lower-seeded team may have lesser odds of winning it all, you’ll have less competition for bracket glory if your team pulls it off.

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