Football. A sport that unleashes a phenomenon, uniting nations and bringing together people from a myriad of backgrounds to cheer as one in support of their team. With the World Cup almost upon us, we’ve taken the modelling skills we use in our day job to predict the outcome.
By using some of the economic tools we usually apply in assessing investment opportunities, we’ve calculated that there is 60 percent likelihood that one of Germany, Brazil, or Spain will win the tournament. Among them, Germany has the highest odds of winning, with a 24 percent chance of lifting the famous trophy. Germany, the current holders, and Brazil, appear set for an easy start, but Spain will have to hit the ground running in its first game if it is to beat Portugal, the current European champions.
In addition, England, France, Belgium and Argentina are all capable of causing an upset. Our simulations show that all four stand a decent chance of lifting the trophy. Argentina’s fate in particular will depend on the form of its star players, which adds an element of uncertainty and is hard to capture in our quantitative model.
Our model incorporates the following factors: World football Elo ratings, a successful qualification campaign, successful participation in previous tournaments, and home advantage. Combining these factors, we’ve calibrated a statistical model using the results of the past five tournaments and estimated the most likely outcome of the forthcoming matches. To account for the many different roads to the final we conducted what statisticians call a Monte Carlo Simulation, drawing a on large number of random variables and using these to bring in a random component to our calculations to simulate the championship.
But the same common disclaimer applies to football as it does to investments: Past performance is no guarantee of future results!
What is an Elo rating?
An Elo rating is an objective measure of team strength that looks at how well a team has played in the past. Unlike other ratings, victories over stronger teams will enhance the rating by more than wins against weaker opponents. Important matches score more than friendly games.
Insights from our investment process for the prediction of football matches
We’ve applied insights and tools from our daily work as investment strategists to predict the likelihood of each team doing well in the tournament.
Not all prediction will be right. But applying a framework to previous tournaments indicates that our model has a high degree of accuracy. Investors face the same with investment recommendations. By following a systematic investment process, we aim to maximize the number of correct calls and their magnitude.
Separate the wheat from the chaff
We’ve tested several different indicators before selecting a few variables that have worked best in the past. Investors have to deal with an overwhelming flow of new information each day. Distinguishing between the noise and important trends is crucial to avoid costly needless portfolio reallocation.
Set aside your emotions
Relying on a quantitative framework, we put our emotions to one side. For investors this assures that the qualitative aspects are not influenced by emotions or other behavioral traps.