I came across an interesting observation during this world cup, this time in relation to the pricing mechanism followed by the bookmakers.
This graphic shows the betting quotes on bet365.com of an outright WC win for each of the participating teams. Going by the law of demand, ceteris paribus, the bet price of an event is an inverse function of its probability. Hence, we can clearly see Brazil, Argentina and Germany are the obvious favorites of the bookies. Now an intelligent investor/gambler would be one who can compare the actual winning probability of a team vis-à-vis its speculative probability of winning. This is similar to arbitrage trading where the price difference is discovered between a security's fair value forward rate and its existing market value forward rate and thereupon arbitraging the price differential to earn profit. However in case of stock market, the inefficiencies decrease with time and the market price tends to move towards the actual fair value whereas in a betting exchange (which consists of more 'emotional gamblers' rather than 'wise investors'), the bookmaker would allow certain inefficiencies to exist so as to attract high volume of transactions.
In the current context, the actual winning probability of teams like Brazil and Argentina might be less than their speculative probabilities (as based on bet365 quotes) especially considering a likely Group 16 Brazil-Spain clash and Argentina's below par performance against Bosnia. On the other hand, teams like Italy and France who are coming at the back of decent performances are being traded at high prices i.e., the bookies want to make you feel that Italy is six times less likely to win the WC than Brazil. That's not right, is it?
Now before I end, I need to make an important disclaimer. Wagering agreements are illegal in India. I do not profess or encourage any sort of irresponsible gambling whatsoever. The above observation is just to share the application of basic statistics and investment fundamentals in sports. Enjoy the game!
For more such feeds, check my blog at investmentcalculus.blogspot.com
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