March Madness Research - Bracketology

Predicting the Future with Basketball Bets

Fantasy stock market games are all the rage with Internet users. The Hollywood Stock Exchange lets you buy and sell movie stars like junk bonds. Intrade.com moderates bets on whether avian flu will hit the United States in 2008. And the Iowa Electronic Market offers odds on presidential hopefuls. Even Yahoo! has its Tech Buzz Game, a fantasy prediction market where players bet on the technologies they think people will search for in the future.

Though many types of exchanges abound, they all operate in a similar fashion.

For the most part, each bet is managed independently, even when the bets are logically related. For example, picking Duke to win the final game of the NCAA college basketball tournament in your online office pool will not change the odds of Duke winning any of its earlier round games, even though that pick implies that Duke will have had to win all of those games to get to the finals.

This approach struck the Yahoo! Research team of Yiling Chen, Sharad Goel, George Levchenko, David Pennock and Daniel Reeves as fundamentally flawed. In a research project called “Bracketology,” they set about to create a “combinatorial market” that spreads information appropriately across logically related bets. In other words, someone picking Duke to win the championship would affect the betting odds offered for nearly every other game played in the tournament.

The Yahoo! Research group recently outlined their work in a paper called “Pricing Combinatorial Markets for Tournaments.” In a standard market design, there are only about 400 possible betting options for the 63-game NCAA basketball tournament. But in a combinatorial market, where many more combinations are possible, the number of potential combinations is billions of billions. “That’s why you’ll never see anyone get every game right,” says Goel.

The challenge with a combinatorial market is that it encompasses a much larger outcome space than a typical market. The key technical issue was figuring out how to incorporate the opinions and picks of every participant, and then appropriately distributing that information over the entire tournament bracket. “We wanted to go beyond what had come before and create a market that shows how bets on each game affect the odds of every other game,” Goel says.

At its core, the Bracketology project is about using a combinatorial approach to aggregate opinions in a more efficient manner. “I view it as collaborative problem solving,” Goel explains. “This kind of market collects lots of opinions from lots of people who have lots of information sources, in order to accurately determine the perceived likelihood of an event.” In fact, forecasts made by prediction markets tend to be far more accurate than those made by individual experts.

With Bracketology, Goel and his colleagues have created a more realistic—and more entertaining—market for the NCAA college basketball tournament. Though more work still needs to be done, it’s possible the application will find a home on Yahoo! for all to enjoy.” Now that’s a fantasy come true.