Predicting the World Cup Is Like Trying to Beat the Market

Swiss bank UBS predicts that Germany will win the 2018 World Cup. Goldman Sachs is calling the tournament for Brazil. EA Sports expects France to take home the gold trophy.

Columbia Business School’s Michael Mauboussin has advice for even the most sophisticated of World Cup predictors: Expect an upset.

“In what sport do underdogs win more than others?” asks Mauboussin, an adjunct finance professor and author of The Success Equation, a book about the role of luck and skill in sports and business. “It happens a lot more often in soccer than in basketball.”

When the World Cup kicks off in Russia in mid-June, 32 teams will have an opportunity to show their skill. Goldman Sachs reportedly simulated 1 million possible tournament variations to predict its champion. UBS utilized 18 analysts and 10,000 computer simulations to come up with a different conclusion. Game-maker EA Sports reached its verdict using analytics that allowed it to successfully predict the 2010 and 2014 tournament winners.

But because of the nature of the sport, luck itself will have a lot to do with the outcome of the tournament. For the business world, the lessons from how luck influences the World Cup can offer takeaways for how investors approach the market and companies value their executives.

Skill = Observed Outcome – Luck

According to Mauboussin, the director of research at BlueMountain Capital Management in New York, the basic way of parsing the influence of skill and luck in sports boils down to a simple equation: Skill = Observed Outcome – Luck. In other words, skill is the difference between a team’s winning rate (or observed record) versus the luck of winning a coin toss (which should happen half the time).

When running the annual numbers for professional sports leagues, Mauboussin found that luck contributed to 31 percent of Premier League soccer teams’ performance, compared to just 12 percent of National Basketball Association teams’ performance and a whopping 53 percent of National Hockey League teams’ performance.

“The win-loss records of NHL teams over a season most resemble the patterns of coin tosses,” says Mauboussin, who plays ice hockey for a rec league in Connecticut. “I should be very careful here, because I got a lot of heat in the locker room from my buddies over this. It is not a statement about the skill of the players, which is insanely high. The way we’d reconcile that is the paradox of skill.”

The paradox of skill is the idea that even as absolute skill rises in any sport or activity, be it soccer or business, relative skill declines which means that luck becomes more important in shaping outcomes. Take, for example, basketball star LeBron James: If he walks onto a playground and challenges every kid to a pickup game, he’ll win on pure skill. But if he walks into the gym of the Golden State Warriors, who are closer to his own skill level, then the game is more likely to be decided on a few lucky shots.

The paradox of skill is a phenomenon we observe daily, be it when highly skilled athletes end up in a dead heat or when highly educated money managers barely match overall market returns.

“Markets are a great example of the paradox of skill,” says Mauboussin, who wrote a 2013 strategy report for Credit Suisse on this topic. “Why is it so hard to beat the market? Because everyone’s so darned smart and they’re working really hard, much of the information in the world is reflected in stock prices. As a consequence, short-term results appear to be very close to random.”

Which brings us back to the World Cup, whose results may also appear random – and why an animal oracle like Paul the Octopus could appear to be the most sophisticated of World Cup predictors in 2010. After the initial round-robin section of the tournament, nations will play each other in one-off matches, with only the winner advancing. This is problematic in the assessment of skill, because it is only over a series of match-ups and performances that a holistic picture of a team emerges.

Soccer scoring also makes the game prone to upsets. A match is often decided by a single goal – as happened when USA lost to Trinidad by a score of 2-1 last October and thus failed to qualify for the World Cup for the first time since 1986. Meanwhile, basketball scores often run into the triple-digits and an NBA champion is decided over a series of seven games, while tennis’ Grand Slam champion is decided over a series of four tournaments, reducing the odds of an overall winner being decided on a lucky bounce.

Moreover, owing to the size of a soccer field and the relatively large number of players on the pitch, players are less able to dominate their game than are basketball or tennis pros. For instance, while Lebron James or Serena Williams can play an entire game and dictate every play, even the best soccer or hockey player has the stamina for only part of a match. James averaged nearly 30 points per game in the latest NBA Playoffs; Lionel Messi averaged less than 1 goal per game in the recent Premier League season.

None of this is to say that Messi isn’t talented, just that James has more opportunities to showcase his skill – a lesson that applies as much in business as in sports.

“You can only assess skill over a longer period of time,” says Mauboussin. “That’s a struggle in the investment industry. We tend to shorten our horizons, whereas for many strategies the sample sizes have to be large to make any kind of reasonable assessment.”