NCAA bracket contests and the stock market

Many enter NCAA basketball bracket contests (There is a definition for those few that don't know what is at the link). I was thinking about some similarities between these contests and how the stock market works. There is "chalk" or favorites, there are upsets, or unexpected events.

Many office pools are won by someone with little knowledge of sports. Why is that? Shouldn't the experts be winning? That's where the stock market analogy comes in. Say there are 20 experts and 20 novices entered in an office pool. The 20 experts are often hearing the same analysis, the same dark horse picks, the same upsets and many will duplicate those picks. If they all did mostly that, then it would come down to a few minor coin-flip type picks and each of the 20 might have a 5% chance of winning, if they were the only ones playing.

Now take the 20 novices and their picks. Some might go by team colors, or good looking mascots, or colleges where they have friends, or other non-sports related methods. With 20 people, there are likely to be a wide variety of non-sports related ways to pick.

Now combine the two pools of 20, the 20 experts with mostly the same picks, and the 20 novices with widely different final four picks and the odds are strong in favor of a winner of the pool coming from the side of the novices. It is almost like a contest with 21 participants, with all the experts in a narrow band.

Again, back to the stock market. Over time, index investors (aka Bogleheads) tend to out perform 80% of active managers. In large part due to lower expenses. NCAA players that mostly stick to "chalk" are like the indexers, and are probably going to do better than most, but unlikely to be #1. Picking stocks isn't all about finding companies that are doing well or even will do well. That's part of the game, but popular stocks get bid up to high valuations. For stock pickers, picking what is going to become popular and being ahead of the curve is what leads to better performance. Like picking upsets, sometimes these will blow up before the company is proven. With the Internet, most everyone has access to similar news and information. A few do have insider info, or specialized industry knowledge, and that will give them an edge.