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.
Become our fan on Facebook and vote for the best stocks to own in Kiplinger's Stock Market Madness.
SEE OUR BRACKET: KIPLINGER'S STOCK MARKET MADNESS 2011
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
SEE OUR BRACKET: KIPLINGER'S STOCK MARKET MADNESS 2011
Become our fan on Facebook and vote for the best stocks to own in Kiplinger's Stock Market Madness.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
Best Banks for High-Net-Worth Clients 2024wealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2024 and 2025: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2024 and 2025.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market does have regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Until May Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until November 2024 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. So how do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
