The Bountiful Game

When banks start predicting football results, you’d better be afraid for your money.

The average citizen of the global community is still pretty much clueless how towards the end of 2007, the smartest men in the world working for the best banks in the business could lead an entire planet to near bankruptcy.  But given that he understands football a little better than sub prime mortgages, he can get some help from JP Morgan Chase, which was kind enough to release a set of football predictions before the World Cup. JP Morgan used what they call a quant investing model to analyse how the World Cup would pan out, and thus gave an insight into the thinking that goes behind spectacularly wrong investments.

The predicted line-up was interesting even from the quarter final level, where it expected England to beat France, a team which didn’t make it to the last 16. Or Slovenia to defeat Argentina. Slovenia, alas, didn’t make it through the first round. To the reasonable question of how any analysis can get Slovenia into the semis, a perusal of the report is necessary, but pointless. It has used valuation metrics (Fifa ranking), market valuations (probability of winning as defined  by bookmakers), price trend metrics (trend in change in probability to win, change in Fifa’s ranking), Market and Analyst Sentiment metrics (expectation of result based on past performance, recent team shape), Fundamentals Metrics (which has this impressive but suspiciously meaningless formula: Average (Probability of Winning) /Max (Probability of Winning)—Min (Probability of Winning). Having crunched all these metrics, it came out with the winner: England. 

There is an attempt to hedge against ridicule through the advice that all this be taken with a pinch of salt. But that is what the investor must not do. For, there is no investing model, quant or otherwise, that has been correct over a period of time. In the mid 1990s, Long Term Capital Management got Nobel laureates to create mathematical models to beat the market. It showed impressive returns for a while before going bust.

JP Morgan is not the only bank treading into the football stadium with an egg on its face. Goldman Sachs also came out with a semi final line-up: England, Argentina, Brazil and Spain. One of four correct is as good as a guess, and would not be enough to pass your exams. But when it comes to your hard-earned money, it’s all par for the course.

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