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CHART CENTRAL

Quant manager offers some bracket advice

In his annual blog post on building a competitive NCAA March Madness bracket, chief investment officer John Riddle, CFA, of Denver-based quant firm 361 Capital offers research and advice on what is best in life: to defeat your co-workers and see their brackets driven before you.

Behavioral finance underlines much of Mr. Riddle's message as well as picking a healthy amount of upsets based on the historical success of lower-seeded teams. He stresses to avoid letting the biases that can negatively affect investors: familiarity bias, anchoring, loss aversion, information overload and herding, among others, while still taking risks to give your bracket a shot.

Mr. Riddle and his team collected historical data from several sources summarizing the successes of picking upsets, or a lower seed defeating a higher seed. While a No. 16 seed has beaten the top seed only once since 1985, or < 1%, No. 10 through No. 15 seeds have come out ahead almost 19% of the time in the first round of the tournament. Looking to the Round of 32, the fourth- and third-seeded teams have barely a 50/50 chance of making it to the Sweet 16, while the second and first seeds are upset 37% and 15% of the time, respectively. From there, no upsets have occurred in the Sweet 16 round in only 6.1% of all third-round games, with half of the higher seeded teams falling about one-quarter of the time. Elite Eight games have seen upsets about 40% of the time.

Looking to the Final Four teams, don't fret if one of your picks loses early and blows up your bracket. A sample of brackets collected by the NCAA found only about 0.5% of high-ranked brackets correctly chose all four teams and only 7.5% had three out of the four. However, 56% of the sample brackets did have a No. 1 seed in the semifinal round.

Mr. Riddle also emphasized diversification when choosing upsets and offered advice on how many to target in the first round. The more brackets in your pool, the more upsets you should chose, within reason. Their research noted that the Wall Street Journal found that for pools of 10, 25 and 50 brackets, an average 8.7, 10.5 and 11.1 upsets should be chosen. From these data points, the curve below was constructed by P&I to fill in the spaces in-between. Note that the benefit of selecting upsets diminishes well before it gets to the full apocalypse scenario of a full 32 upsets.

Keep this in mind as you wait until after work to catch up on the day's action and see how your bracket is faring.