I read in the Wall Street Journal about a study written by Alex Edmans of the Massachusetts Institute of Technology, Diego Garcia of Dartmouth College and Oyvind Norli of the Norwegian School of Management. They found that World Cup losses deliver a statistically significant market decline the next day, with greater impact on small stocks. Winning provides little benefit, as national supporters apparently price in their team’s victory.
An example of this came in the 2002 World Cup quarterfinal, when 86% of British fans polled mistakenly thought England would beat Brazil — ranked as the world’s best team — while the most generous bookmakers saw only a 42% chance of English victory.
Based on this study then, one could implement this type of “World Cup” investment strategy: Choose a game where the likely loser of a big game is a country of great soccer patriotism and broad share ownership and, say the authors, “short futures on both countries’ indices” to get maximum return from the asymmetry that losers get hit harder than winners benefit.
As the authors says, “It may offer the surest road to victory.”