March Madness: Don’t Gamble Away Your Retirement

If you’re serious about college basketball, you’ve already downloaded a blank bracket and filled in your 68 teams, the outcomes through to the Final Four and the championship NCAA game on April 7.

And you nearly certainly will be wrong. Way, way wrong. But you already knew that and filled it in anyway because your office friends are doing it, or you have a family rivalry going on, or maybe you’ve decided to enter the $1 billion bracket-guessing giveaway promoted by the billionaire Warren Buffett.

How badly will you miss? Consider some real-life probabilities. Here are your chances of…

  • Dying, someday: 1 in 1
  • Dying of cancer, someday: 1 in 7
  • Air-crash death: 1 in 7,229
  • Death by killer bees (or hornets or wasps): 1 in 71,107
  • Killed by lightning: 1 in 126,158
  • Winning the New York State Powerball: 1 in 175,223,510
  • Correct NCAA bracket with reasonable basketball knowledge: 1 in 128 billion
  • Correct NCAA bracket by chance (coin flipping): 1 in 9.2 quintillion

Quintillion. That’s 1 billion times 1 billion, then times 9.2. The Smithsonian figures that at any given time there are 10 quintillion living insects on Earth. A Rubik’s Cube has 43 quintillion possible permutations.

Feeling any better about that bracket? I know. It’s fun, and harmless. Yet a surprising number of people take the job of filling in those 68 slots extremely seriously.

The political blogger, presidential-election handicapper and number cruncher extraordinaire Nate Silver has kicked off his new sports blog with an interesting table that breaks down the chances of each team making it through each round and on to the final.

Yet even he is quick to point out that his current top pick, the Louisville Cardinals, has a 15% chance of winning it all. Which is just another way of saying an 85% chance of losing.

Worse than gambling

Slots are a bit better, but not much. A slot machine’s take is 35%, meaning for every $100 played the gambler keeps just $65. Keep playing and eventually you will lose all of your money. The house wins the long game 100% of the time.

Most people who walk into a casino realize they will lose money. Retirement investors, however, do not have the luxury of coming back to gamble another day. They cannot recover from a catastrophic loss, yet they approach retirement in a way that’s arguably worse than the most addicted, inveterate gambler.

For one, too many investors fall for what behavioral scientists call the “gambler’s fallacy,” the mistaken belief that recent outcomes affect future outcomes.

For example, if you flip a coin for long enough, you are likely with a fair coin to end up getting heads half the time and tails the other half. However, the fact that you just flipped heads four times in a row has no bearing on the next flip. Your chances of heads coming up again (or tails) remains exactly half.

Where this kind of thinking traps investors is in believing that a recent bull market run means that they, or anyone, can discern the future direction of stocks either way.

When things go well in the markets, you hear a lot from the perpetual bulls — and from the perpetual bears — all over the financial media. Managers who haven’t been interviewed in years are dusted off and trotted out to make the rounds.

Both sides offer “reasons” why the stock market will continue higher or, conversely, why stocks are clearly ripe for a fall.

A solid prediction

Just about nobody predicts a steady sideways crawl, with dividend and interest payments piling up along the way, ending up somewhere north of long-term inflation. Where’s the fun in that? Or the ratings?

And that’s the other trap retirement investors fall into: confirmation bias. If you are a bull in this market, it’s not hard to find “experts” who will show you all the reasons that you are right. If you are a bear, a click of the TV remote or your mouse provides an endless supply of cogent and convincing explanations as to why you should take cover, quick.

Here’s a prediction: The stock market will go up and it will go down. Investors who ignore these movements, stay invested in a variety of assets, collect their dividend and interest payments and rebalance their portfolios with discipline are likely to prosper. Most everyone else will be crying in their beer, griping about what should have been and promising next time will be different.

Sound familiar? A lot of that will be happening to bracket-fillers in the coming weeks.

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