Trusting the Experts?

Expert knowledge is at a premium.

In colleges, there’s the US News rankings. In investments there’s the credit rating agencies. And in football there’s the USA Today Coaches Poll.

During the regular season USA Today polls about 60 coaches each week to determine the ranking of the top 25 college football teams. The polls are closely watched by millions of fans, and the final poll is especially important because it is used to determine the eligibility of teams for the Bowl Championship Series.

Because each coach’s ranking is public, people can see how they rate themselves, teams in their conference, and teams in other conferences. There are lots of ways to game this system: if you rate the teams you beat higher, it improves your standing; if you rate your own team higher, it helps you, and so on. Hundreds of millions of dollars are at stake: football budgets often go up when a team is ranked higher, and many coaches have contracts that pay them more if they play in a bowl game.

By examining the ballots, researchers found that the greater the financial incentive, the greater the distortion this had on a coach’s rankings. This was especially of the teams ranked 11 to 25, where there’s a lot of jockeying for position to make into the top 10. And rankings changed a lot in 2005, when each coach’s ballot was made public. But the bias persisted

Because the results are so visible, the conclusions are clear: experts, even well-intentioned ones, respond to incentives. Transparency helps, but only so much. It’s important to understand this, since we rely on experts for so many things. Getting the incentives right is the real Super Bowl of finance.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T17:25:58+00:00 December 29th, 2011|Global Market Update|0 Comments

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