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Bracket that behavior

March Madness gets the quant treatment

361 Capital’s John R. Riddle

The behavioral biases that can affect financial decisions also could bust a March Madness bracket.

That's the belief of John R. Riddle, co-chief investment officer of 361 Capital LLC, a $1.5 billion quantitative equity manager that incorporates behavioral finance into its investment processes. Mr. Riddle said there are 10 behavioral biases in investing that can also affect anyone's selections in the NCAA Division I Men's Basketball Tournament, this year slated for March 13-April 2.

The biases are familiarity, anchoring, loss aversion, information overload, herding, recency bias, confirmation bias, overconfidence, gambler's fallacy and the halo effect.

Filling in a tournament bracket "is like investing," Mr. Riddle said. "It all comes down to forecasting. The seedings take that into account. It's like a stock price. If you go against it, you're saying you can forecast better than the consensus out there. And biases can affect that."

Mr. Riddle also has suggestions to avoid those biases. Among them:

Don't pick the three teams most familiar to you to beat higher-seeded opponents.

Don't pick teams based on a single statistic or having seen them play only once or twice a season.

Choose No. 12 seeds over No. 5 seeds, an upset choice that has happened in 28 of the past 32 tournaments.

Aggregate picks from several pundits instead of basing them on just one; seek out negative information on teams; and don't pick teams based on the notion that they're due to win a title.

Don't pick a Cinderella story — a team seemingly destined to win.

Mr. Riddle's March Madness report is available on 361 Capital's website. The 68 teams in the NCAA tournament will be announced March 11.