Why Bracket Pools Are A Better Investment Than The Stock Market
March 7, 2017 - by Tom Federico
It’s true that luck plays a role in determining who wins any particular bracket contest — sometimes a big role, depending on the pool’s scoring system.
However, that doesn’t mean that luck is more important than skill. In the long term, good luck and bad luck even out, and smart decision making prevails. The smarter you pick, the less luck you need to win.
That dynamic makes bracket pools more than just games. They’re legitimate investment opportunities for serious players.
And in the long term, if you’re a skilled bracket pool player (e.g. someone that uses our NCAA Bracket Picks product), your investment in bracket pools can yield higher profits than anything else you can do with your money.
The Investment Profile Of Bracket Pools
To kick off our analysis, it’s important to frame the risks and rewards of playing in NCAA bracket contests.
In bracket pools, you enter a roughly one-month-long contest that typically pays the winner many times the amount of his or her entry fee.
As an example, a 30-person bracket contest with a $100 entry fee generates a total of $3,000 in prize money. If the winning bracket takes home the entire pot, that works out to a 9,900% profit on its $100 entry fee — in a month.
That’s an incredibly attractive reward.
What about the risks?
The bad news, of course, is that in order to win first place in a 30-person bracket pool, you need to beat 29 other entries. That’s not easy.
What are the odds exactly? Assuming that all 30 entrants in the pool (including you) are equally skilled at bracket picking, you have a 1-in-30 chance to win the pool each year. Pretty simple math.
Practical translation: With average skill, you are expected to win a 30-person bracket pool roughly once every three decades. And in the long term, you won’t make a cent playing in that pool. Any prize money you win will be offset by the entry fees you squander during losing years.
Oh, and by definition, a whole lot of people aren’t even average at picking brackets. Their prospects are even worse.
The Impact Of Being A Better Bracket Picker
Luckily, you don’t have to be an average (or worse yet, below average) bracket picker. By exploiting the dynamics of bracket contests, you can generate a big edge over your opponents.
As part of building and refining our NCAA Bracket Picks product, we’ve run millions of computer simulations of bracket pools, covering a wide range of scoring systems and pool sizes, and across many NCAA tournament years.
In the process, we’ve algorithmically generated and tested over 100 billion different brackets.
Our simulation-based testing shows that in many types of pools, having the smartest picks going in should make you at least 2-3 times as likely to win your pool — and up to 10 times as likely in some combinations of pool sizes and scoring systems.
More importantly, we’ve proven this theory in real life. Last year, for example, across all pool sizes and scoring systems, our bracket picks customers were 2.3x as likely to win a bracket pool prize than their competition.
So what does that mean exactly?
The Long Term Payoff Of Having An Edge
Let’s go back to that 30-person, $100 buy-in, winner-take-all pool example. Here’s what it means to double or triple your odds to win that pool:
- If you double your odds to win, you’d be expected to win the pool every 15 years instead of every 30 years, and win an average of $200 in prize money every March
- If you triple your odds to win, you’d be expected to win the pool every 7 or 8 years instead of every 30 years, and win an average of $300 in prize money every March
Even with a big edge, you’re still going to lose this bracket pool way more often than you win it. However, you’ll experience the sweetness of a prize money check and bragging rights a lot more frequently.
And while the year-to-year results will be boom or bust, over the long term, you’d be expected to earn a 100%-200% return on the entry fees you invested in bracket contests.
That’s a realistic expectation, and it compares quite favorably to stocks, bonds, or real estate.
How Are Such High Returns Even Possible?
It’s fair to question how it’s possible for someone who is a very skilled bracket picker to expect such an amazing long term expected ROI.
The short answer is that bracket pools are typically highly inefficient markets, especially when compared to public investment vehicles, but also when compared to traditional sports betting or daily fantasy sports.
Here are a few reasons why:
1. You’re probably not going up against a bunch of pros.
Unlike the stock market or daily fantasy sports, most bracket pools are relatively small or local affairs that aren’t open to everyone. Consequently, you’re much less likely to be competing against professional operators who “do this for a living” and are at a huge information advantage over you. Either they weren’t invited into your pool, or the prize pool (if it’s only hundreds or a few thousand dollars) isn’t big enough to be worth their time.
Of course, there is a flip side here. Even if you wanted to, it’s very difficult in today’s climate to, say, invest a million dollars in bracket pools every year, when access to pools is so limited. That’s part of the reason why the expected returns are so high. So you probably won’t ever become a millionaire playing in bracket pools, but you sure can make some great side money.
2. There’s a lot of dead weight in bracket pools.
That intern from marketing who knows nothing about college basketball and picks by team colors occasionally will get lucky and win your company pool. But in the long term, a skilled picker will outperform that person much more often than not. Peer pressure to enter bracket contests combined with relatively modest entry fees help encourage people who don’t really know what they’re doing to play against you, and that money adds up.
3. You usually don’t pay a commission to play.
In traditional sports betting, you place bets at a sports book that effectively charges you a commission (often called the “vig”) to place a wager. If you’re making a point spread bet, you may need to bet $110 to win $100 back if you’re right (10:11 odds). Payout odds for other bets like parlays and futures are often skewed even more strongly in favor of the house. Likewise, daily fantasy sports sites can charge a “rake” of up to 10% of your entry fee just to play.
Fees like these make a big negative impact on your long term expected profits, but bracket pools are usually administered by volunteers and/or run on free sites like ESPN.
But Can You Think Like Warren Buffet?
We can scream about the fantastic investment opportunities that bracket pools present until our faces turn red, but one thing is certain. Achieving these returns often takes patience. Sometimes, a lot of patience.
It’s a buy-and-hold, trust-the-process type of approach whose value may only become evident over a timeframe of years.
Even if you’re a better bracket picker than your opponents, you face some unavoidable realities when you’re playing against 20, 50, 100 or more people:
- Even the best bracket picker in the world isn’t expected to win any decently sized pool they enter
- In the vast majority of pools, the odds of winning nothing are much greater than the odds of winning something
- Losing a pool to great-aunt Sally, who picked that 9-seed to make the Final Four because her best friend Ethel went to college there, is a very real possibility in any given year
In the short term, the risks of playing in bracket pools and losing all your entry fees are high, no matter how good you are — especially if you’re only playing in one or a couple pools per year.
Fortunately, what happens in any one year is not indicative of what is likely to happen over 5, 10, 20, or 30 years.
Appendix: Should You Pay For Good Bracket Advice?
Doubling or tripling your odds to win March Madness bracket pools obviously sounds good in a vacuum. And we happen to have built a successful business around it.
At the same time, paying for data-driven bracket advice like ours also costs money, and as a result, impacts your expected profits. Is it worth paying for?
Here’s some data on what that means in practice, and why our business model has been successful.
The Financial Impact
Let’s say you pay TeamRankings $39 a year for bracket picks (though the effective price is significantly less if you play in multiple pools per year, since you can use our product to get picks for all of them).
Here’s how it would impact your returns in that 30-person, $100 buy-in, winner take all bracket pool:
- Over 30 years you would pay TeamRankings a total of $1,170 for bracket picks
- If our picks double your odds to win pools, on average, you’d expect to earn around $3,000 in extra prize money over that time period. Subtracting our $1,170 in fees, your profit on our picks would be $1,830 (a 56% return on investment).
- If our picks triple your odds to win pools, you’d expect to earn around $6,000 in prize money. In that case, your profit on our picks would be $4,830 (a 313% return on investment).
Those are rough calculations, but still, that’s a pretty spectacular expected ROI. It goes up even further if you enter pools with bigger payouts; it goes down if you enter pools with smaller payouts.
The Non-Financial Impact
Of course, competing in bracket pools isn’t all about winning money. Let’s not forget:
- Bragging rights. Beating your husband or co-workers in a bracket pool grants you a full year of in-your-face, nice-try-buddy, better-luck-next-time gloating privileges. That is literally priceless to some people, we have learned. Especially the husband thing.
- The value of time. Most people don’t want to spend four days straight pouring all of their time into researching bracket picks. They’ve got jobs, kids, or all-terrain vehicles they could be spending valuable time with.
- Stress avoidance. Filling out a bracket can be incredibly nerve-wracking. And most people aren’t mathematicians and engineers who have built sophisticated technology to identify the exact picks that maximize their odds to win. You may not want to invite geeks like us to your next Thursday Night Beer Bust, but we at least have the data and research to help you make confident bracket decisions.
All this stuff has very real monetary value for a lot of people. If you’re a hotshot lawyer with a $500/hour price tag, it costs you like $127 in lost billable time just to go to the bathroom, never mind spending an entire afternoon on bracket research.
Wrapping It Up
Losing in most years is an unavoidable dynamic of bracket pools. You should never expect to win.
However, occasional bracket pool wins more than make up for years of losses. You don’t need to win pools very often; you just need to win often enough to generate fantastic long term returns.
What is needed, therefore, is a long term perspective. That level of understanding doesn’t come easy to many people, since it’s especially difficult to stick with an approach that may not deliver a big payoff for years.
But bracket pool players who employ smart, data-driven strategies AND are patient enough not to abandon the right strategy solely because of short term bad luck, will do very well for themselves.
You hear these same themes repeated by long-term winners in many other types of investment markets, and they apply to bracket picking as well.