March Madness and Investor Behavior: Are They Related?

No doubt many of you watched, either cheering or agonizing for your favorite team, as the NCAA men’s basketball tournament took over the screens and attentions of most American sports fans during March and early April. As we now know, Virginia, the #1-ranked team, prevailed over the scrappy #3-ranked challengers from Texas Tech, winning the final in overtime, 85-77.

Some would point out that Virginia held the #1 ranking for good reasons. They were consistently ranked in the very top of the NCAA for qualities like defensive efficiency against opponents, offensive efficiency, and other important attributes. And yet, a surprisingly low number of those submitting brackets for the NCAA tournament picked Virginia as the ultimate winner. Who was the majority pick to win the NCAA tourney? Duke.

Of course, anyone who has followed major college basketball for any length of time would not be surprised at this. After all, Duke has a well-earned reputation for winning basketball championships, having notched five of the coveted national titles, along with eleven appearances in the final game. And yet, statistically, Duke was far beneath Virginia in offensive and defensive efficiency, along with several other categories. So why, one must ask, would Duke be picked to win the 2019 NCAA men’s basketball championship by more than seven times as many people as Virginia, the eventual champion?

For a more complete explanation of this apparent anomaly and its interesting correlation with investor behavior, watch for our monthly eNewsletter in early May. But for now, suffice it to say that it is possible many people picked Duke over Virginia for the same reasons so many investors succumb to what we sometimes refer to as the “stock du jour” syndrome: recency bias and too much reliance on the media.

Duke’s impressive forward, Zion Williamson, garnered a huge amount of positive press during the run-up to the NCAA tournament. Conversely, many sports pundits lacked confidence that Virginia’s defensive style of play could carry them through the tournament to the championship. They focused on last year’s historic first round loss in the NCAA tournament to UMBC and ignored the fact that Virginia was ranked in the top five with one of the most efficient offenses this season. In other words, the opinions of the “experts,” combined with Duke’s admittedly strong credentials, likely combined to persuade many observers that, statistics notwithstanding, Duke had a much better chance of winning the tournament than Virginia. And their submitted brackets reflected that belief.

As we’ll suggest in more detail in our eNewsletter, investor behavior is often unduly influenced by non-logical and/or emotionally biased premises. Or, as the quote often attributed to Will Rogers succinctly puts it, “It isn’t what we know that gives us trouble; it’s what we know that ain’t so.” Clearly, a large majority of basketball fans “knew” that Duke was more likely to win the NCAA tournament than the better statistical choice, Virginia. How many investors “know” that today’s hot investment—whatever the media may be trumpeting—is a sure winner? And how likely are they, like those who picked Duke over Virginia—to be proven wrong?

For additional insights, watch for our May eNewsletter.