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3.07.2006

Gaming the office pool 

Via jackdeuce comes this article on how to win the office March Madness pool.

I'll spare you the trouble of reading the article and summarize its two points for you here:



Of course, I would have thought that an avid index-funds investor like jackdeuce would be content to pick the higher seed in every game up to the Final Four. Either that, or copy ESPN's national bracket.

Comments:

i know you were joking with the index fund remark. but picking the higher seed or copying the ESPN bracket is actually more like taking the advice of a mutual fund advisor, in that you are trusting the opinion of a small group of people rather than the entire market.

in any case, march madness pools would obviously be less efficient than financial markets, due to lack of transparency, the small size of each pool, and the fact that there isn't an auction pricing scheme for entries. (e.g., you should be able to buy a highly improbable bracket at a discounted rate.)
 


Picking the higher seed would be heeding the advice of the selection committee, which I think is equivalent to heeding the advice of S&P. The equivalent of purchasing a mutual fund would be copying Dickie V or Digger Phelps's bracket.
 


ah, so that's what you meant. well, i don't believe there's anything special about the s&p 500 index. as you may recall i own total stock market index shares. the main things i believe in are low turnover (= tax efficiency and lower transaction costs), diversification, and low management fees. that, not the s&p committee's judgment, is the rationale for index funds. regarding the s&p committee, i would be just as happy to throw 500 darts at a newspaper.
 


A total stock market index would be comparable to ESPN's national bracket, which averages out several million entries.

There's no analog of fees for NCAA brackets (unless someone is dumb enough to pay money for ESPN insider just to see Dickie V's brackets), but you're still making an active choice (even if it is a lazy one) to trust the relative weights the fund manager assigns to each market sector when you buy a total index fund.
 


A total stock market index would be comparable to ESPN's national bracket, which averages out several million entries.

But using this for your small local pool doesn't necessarily make sense. As Yao points out, different strategies are required for small and large pools. This was the main thrust of his article.

you're still making an active choice (even if it is a lazy one) to trust the relative weights

The fund manager has little freedom in choosing weights, since his sole objective is to track the corresponding index (Wilshire 5000 in the case of a total market fund). If you're really mistrustful, each fund publishes its holdings with percentages annually. Since index funds have annual turnover of ~4% (I think) you can be quite sure of what you are holding. The same cannot be said of many mutual funds.
 


It seems where index funds really shine is when composed of a large number of distinct stocks. Making some assumptions about the distributions of returns on individual stocks, then the average will be a gaussian with smaller standard deviation. Certainly one gives away the possiblity of larger than average returns, which is what is desired psychologically with gambling. But for investing, historical numbers indicate that average returns are quite good.

With respect to sports betting, a total stock market index would be like taking an average of a few years of betting. If one is doing office pools, then one probably has around as much money as they started with as it is even odds with a zero sum for the combined participants. If one is betting in Las Vegas, then they have lost a lot of money.

It seems that the fundamental issues is having better information as to the final outcome of the event than other particpants. If this isn't true, then it isn't realistic to expect to do better than average.
 


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