A Value Investing Approach to March Madness 2013

Picking good NCAA Basketball Tournament brackets is a lot like value investing: look for good opportunities that are undervalued in the market. I've exerimented with this approach for years now and finally decided to write some code to automate the process. I linked up with a friend Chris Mihm who's been using a similar approach and we started geeking out on hoops math.

The Strategy

Value investing compares how good an opportunity is (e.g. company fundamentals) with its market value (e.g. stock price). Our strategy uses Vegas odds of overall victory as the measure of how good a team is, and the popularity of the team in Yahoo's pool as the market value. We look for big disparity between these two values as a guide in making bracket picks likely to outperform in a pool.

Pool Size

The size of the market makes a huge difference in how this plays out. If you're playing a 10-person office pool, don't bother with this strategy. Make your picks based on Vegas odds alone. This strategy becomes valuable as pool sizes grow. I use it for a 400-entry pool and it definitely makes sense for large pools like Yahoo, ESPN, CBS, etc.

Interactive Bracket Optimizer

We built a bracket optimizer tool called BracketWise. It's not quite ready for primetime this year, but might be of interest for hard-core bracketology geeks.

What teams should I pick in 2013

The table below shows the disparity between Vegas and Yahoo for the teams that have meaningful numbers in both categories. Make picks by looking at the Vegas odds and the Vegas/Yahoo ratio. For medium-size pools (e.g. 400 people), you may want to emphasize very good teams who also have good ratios, e.g. Florida has 10/1 odds to win it all in Vegas but is 40/1 in Yahoo, so you get a 4x "value advantage" from Florida. As pool size gets larger, you need more good risk to compete, so you might consider New Mexico, who has 20/1 odds to win it all in Vegas but is 200/1 on Yahoo for a 10x "value advantage".

Vegas = Vegas odds for overall tournament winner - source

Yahoo = Yahoo bracket pool pick distribution - source

Team (seed) Vegas Yahoo Vegas - Yahoo Vegas / Yahoo Pittsburgh (8) 0.0166 0.001 0.0156 16.666 Missouri (9) 0.0133 0.001 0.0123 13.333 Marquette (3) 0.0333 0.003 0.0303 11.111 New Mexico (3) 0.05 0.005 0.045 10.0 Saint Louis (4) 0.04 0.004 0.036 10.0 Arizona (6) 0.02 0.002 0.018 10.0 Oklahoma State (5) 0.01 0.001 0.009 10.0 North Carolina State (8) 0.02 0.002 0.018 10.0 Minnesota (11) 0.01 0.001 0.009 10.0 UNLV (5) 0.01 0.001 0.009 10.0 Notre Dame (7) 0.01 0.001 0.009 10.0 Oregon (12) 0.01 0.001 0.009 10.0 VCU (5) 0.02 0.002 0.018 10.0 Wisconsin (5) 0.05 0.006 0.044 8.3333 Kansas State (4) 0.02 0.003 0.017 6.6666 UCLA (6) 0.01 0.002 0.008 5.0 Butler (6) 0.01 0.002 0.008 5.0 Memphis (6) 0.01 0.002 0.008 5.0 Villanova (9) 0.005 0.001 0.004 5.0 Florida (3) 0.1 0.025 0.075 4.0 North Carolina (8) 0.0166 0.005 0.0116 3.3333 Syracuse (4) 0.0333 0.011 0.0223 3.0303 Michigan (4) 0.0555 0.02 0.0355 2.7777 Michigan State (3) 0.0666 0.025 0.0416 2.6666 Illinois (7) 0.005 0.002 0.003 2.5 Ole Miss (12) 0.002 0.001 0.001 2.0 Georgetown (2) 0.0555 0.029 0.0265 1.9157 Duke (2) 0.125 0.073 0.052 1.7123 Gonzaga (1) 0.1 0.066 0.034 1.5151 Kansas (1) 0.125 0.093 0.032 1.3440 Miami (FL) (2) 0.125 0.094 0.031 1.3297 Ohio State (2) 0.0666 0.056 0.0106 1.1904 Indiana (1) 0.1428 0.171 -0.028 0.8354 Louisville (1) 0.2222 0.284 -0.061 0.7824

Feedback Please

We'd appreciate feedback on the strategy and your thoughts on how you might use it to make picks!

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