Why Soccer Defies the Odds — Even for Oddsmakers

soccer

Before the FIFA World Cup began in Brazil, Goldman Sachs forecast that the winner would be the team from the host country. However, ING was confident that the winners would be the “Red” team from Spain, which emerged the victor in the 2010 World Cup.

Although past statistics provide no guarantees for the future, they have influenced the prices that companies pay for insurance policies that cover marketing campaigns linked to the results of the World Cup.

Germany’s crushing defeat of Brazil in the semi-finals, and the inability of Spain to go beyond the initial round of matches, has demonstrated how difficult it is to predict the winning team in a sport that involves so many complex variables, or the wisdom of making promotional promises linked to the results of the Cup competition.

The FIFA World Cup will bring in a total of more than 1.5 billion euros (about $2.045 billion) in sponsorships from major brands. But the soccer tournament has also involved expenditures of billions of dollars in a secondary market in which companies try to take advantage of the image of their national teams. In these kinds of promotional campaigns, firms promise, for example, that if the national team from their home country winds up winning the championship, they will award prizes — such as a new car — to some customers, or that they will refund the purchase price of products bought as part of the campaign.

For example, in a strategy that became popular during the 2008 European Cup, German electronics retailer Media Markt was compelled to refund 25% of the price of the television sets purchased by more than 13,000 customers. The retailer had promised to do so if Spain reached the quarterfinals of the competition. This marketing campaign was so successful that the retailer repeated it during the 2010 World Cup. The second time around, however, the campaign was more selective, as the retailer promised to refund consumers’ purchase price only if Spain’s Red team was able to win all of its matches.

Similar promotions have been launched by other companies, such as computer maker Toshiba and even Spain’s Banesto Bank (which is now part of Santander Group). Overall, the sectors that employ this type of marketing promotion most frequently are technology, food, hotels, banking and supermarkets. Businesses of all sizes are mounting such campaigns — including small local firms, notes Andres Martinez, a specialist on sports events at the Marsh & McLennan international insurance brokerage house in Madrid.

In the world of soccer, “one referee can make a mistake” that proves key to the eventual outcome of a game, yet has no chance of being reversed.

Why are so many firms engaged in World Cup-related promotions? Felipe Monteiro, a senior fellow at Wharton’s Mack Institute for Innovation Management, says that interest in the World Cup has peaked “as audiences view matches that are broadcast simultaneously around the world” and discussed on social media. Although the “passion was always there,” he notes, the explosion of social media channels has heightened interest in World Cup games.

Calculating the Odds

The insurance premiums paid for hedging the potentially high cost of such campaigns are based on widely varying assessments of the likelihood that various teams will emerge as the ultimate winner of the Cup. For its part, Goldman Sachs has studied the statistics available about World Cup competitions ever since 1960. According to its calculations, announced before the matches began, Spain had a 9.8% chance of winning the top prize, compared with Brazil’s 48.5% chance. Goldman Sachs put Argentina’s chances of winning at 14.1%, and Germany’s at 11.4%. According to Goldman’s analysis, the chances of a Spanish victory were lower because “as history shows, the dominant force is always beaten at some point,” and Spain has been the top team since 2008.

ING used a completely different set of data to predict that Spain’s team would be the grand-prize winner. Rather than focus on historical statistics, the firm’s research took other variables into account, particularly the quality of the players on each team. ING’s view of quality focused not on sports achievements, but the total market value of the members of each team. For example, the Spanish team was valued at 675 million euros (some $920 million), compared with 609 million euros for Germany, and 507 million euros for Brazil.

Another financial institution, Danske Bank, also made its own financial forecasts, in which Spain did not play as big a leading role as its rivals. Danske had Spain falling to Italy during a quarterfinal round. (In reality, Italy, too, was eliminated in the group-stage round.) According to the institution’s forecast, the Spanish team had only a 4% probability of winning the World Cup. The now-eliminated Brazilian team was the favorite in Danske’s analysis, with a 45% chance of victory.

Wharton management professor Mauro Guillen, who is also head of the Lauder Institute, notes that statisticians have made significant progress in gathering and analyzing the type of data that is useful in determining why a particular team will succeed. It is important to create a statistical model that analyzes the right kinds of data, he says, using such statistical measures as how long a team keeps the ball, and whether it tends to rely mostly on one or two star players. But Guillen adds that soccer “is one of the hardest sports to predict” because there are so many different variables at play.

According to Monteiro, mistakes in the business world “are usually corrected by the markets” over time. In the world of soccer, however, “one referee can make a mistake” that proves key to the eventual outcome of a game, yet has no chance of being reversed. Video replay has become a commonplace tool for reversing human misperception in sports such as tennis, baseball or American football. But “you can’t reverse a penalty kick or player offside” decision, says Monteiro, meaning human error has an “unprecedented” impact on soccer, irrespective of all the statistical calculations about the likely outcome.

The structure of the championship playoffs adds to the lack of predictability, notes Monteiro. During the “knock out” or final stages of the World Cup competition, the ultimate winner of the event is determined by the outcome of a single match, unlike the World Series of baseball or the National Basketball Association playoffs, which can last as many as seven games. “Even if you have the best players, [if they] are not playing well” on a particular day, and “if something unexpected happens in your performance,” the outcome will defy the odds “despite all the predictions you make” based on data analysis, says Monteiro.

Overall, this year, insurance policies taken out for promotions linked to the Spanish team cost retailers about 15% of the total cost of their Cup-related promotional campaigns.

More fundamentally, in soccer, scoring is not only rare, but also there is only one way to score, so teams that fall behind cannot make up ground quickly by scoring multiple points the way they would in baseball (by hitting a home run that brings in multiple batters), or by hitting long-range, three-point shots in basketball.

Spain’s Demise

Spain’s rapid demise, and Brazil’s heart-breaking defeat, in the 2014 World Cup serve as a prime example of such unpredictability. Guillen attributes the Spanish team’s failure to a few factors that apparently were not given much, if any, weight in the statistical analyses that concluded Spain would win out. “The average age of the players on the Spanish team was older,” meaning the team was apparently past its physical prime, notes Guillen. Second, the team “had not innovated for the last 10 years,” yet it had enjoyed tremendous success. According to Guillen, Spain’s mindset was: “What we do is working well, so why change it?” Third, because of Spain’s past success, “every other team has been analyzing how Spain plays,” Guillen adds. Chile and the Netherlands used that analysis to create an effective strategy.

Nevertheless, given Spain’s past success, some retailers hedged their bets by signing insurance policies, just in case Spain emerged victorious and the retailers were forced to meet promotional obligations to their customers. For example, Media Markt spent 14% of the funds that it took in as a result of its promotions linked to the Spanish team on an insurance policy. Overall, this year, insurance policies taken out for promotions linked to the Spanish team cost retailers about 15% of the total cost of their Cup-related promotional campaigns, according to Martinez of Marsh & McLennan.

That rate was lower than what was paid by companies for promotions linked to the European Cup, which stood at around 20%. That’s because there was a higher probability that Spain’s team would win the European Cup. Before this year’s World Cup began, the insurance companies viewed Brazil as the probable winner of the World Cup, followed by Argentina, Germany and Spain in terms of probability, notes Martinez. Martinez adds that the insurance firms take into account all sorts of data to calculate the rates that they charge. For example, the odds that the Spanish team would win were lower than in the past because over the last 50 years, no team that has won two consecutive European Cups has also emerged victorious in the World Cup. “They study all of the variables, from the teams’ opponents and the country that hosts the competition, to how the results are being received at the betting houses down the street,” Martinez states.

Manuel Romera, who heads the finance department of the IE Business School, explains that Cup-related products are not very different from any other type of financial products that involve probabilities, in that the final result cannot be predicted with any certainty, not even remotely. Such is the case, for example, with swaps, a financial hedge that involves futures contracts.

Thus, while Brazil was the favorite team of the majority of financial institutions, it will ultimately not be the winner. Goldman Sachs, for example, predicted that Brazil would win the 2010 South Africa World Cup. However, Spain came away with that trophy. But experts recognize that these statistical analyses are useful for companies. Both Romera and Martínez advise firms to hedge their bets with an insurance policy that limits their economic damages, which can be very costly.

Wither Sponsorships?

Sports experts at Marsh & McLennan explain that promotions tied to the World Cup are very positive for brands, since the companies are able to link themselves to an event that has a very large media impact, but without having to deal directly with the high costs of becoming an official sponsor. Often, notes Martinez, companies launch promotional campaigns that favor their own country’s team, and forecast that their national team will be the winner.

“In some cases, the proximity [of the match in terms of its timing] is a more powerful factor than the historical data.” –Manuel Romera

In the case of Brazil, Argentina, Germany and Spain, which were this year’s favorites, the insurance premiums were much higher than those for other countries. In the case of Spain, the cost was as much as 15%, so some companies looked for alternative possibilities, such as in the case of Media Markt, which once again promised to reimburse the cost of a purchase based on World Cup results. This year, however, the retailer did not link up with the any particular team. Instead, it left its customers to decide which two teams would play in the final match.

According to Martinez, in order to lower the premium a company pays, it has to “include some sort of conditionality” in its promotional offer, such as that the winning team has been victorious in all of its matches, or that the winning goal was scored by a specific player. That reduces the odds and lowers the premium that the insurance companies charge. Marsh recommends that companies undertake a very clear and transparent campaign. If that doesn’t happen, there could be insurance claims on the part of customers, causing damage to the reputation of the firm making the promotion and erasing some of the benefit of tying the brand to the World Cup in the first place.

For example, in 2010, Facua, a consumer association based in Seville, Spain, publicly criticized Toshiba for not refunding the price of consumer purchases after Spain won the South Africa World Cup. The organization accused Toshiba of deceptive advertising, saying the foundations of the promotional campaign were not clear. The electronics maker ran advertising in several countries saying that it would refund consumers’ money toward purchase of a laptop or TV if the buyer’s home nation won the World Cup. It turned out that the fine print included a requirement that customers register their products on Toshiba’s website by a certain date.

On the other hand, premiums also vary in price according to when the insurance policy is purchased and the campaign is initiated. “As time passes, the effectiveness of this approach to providing insurance continues to decline,” while its cost rises in effect, notes Martinez. The same thing occurs when companies decide to launch a promotion that becomes obsolete — for example, after the quarterfinals of the Cup, at which point everyone knows which four teams will fight against each other in the semi-finals. In those instances, the countries that have passed that milestone, despite all forecasts to the contrary, will inevitably see their insurance premiums shoot up and the media impact of their campaigns increase.

“There is a psychological effect that the market takes into account,” notes Romera. The fact that a country’s team — for example, Spain — has won the previous Cup means that companies will pay a higher premium in order to run a campaign that assumes that Spain will once again emerge the victor — even though Spain’s odds of winning are actually lower than those of the other teams, from a statistical point of view. “In some cases, the proximity [of the match in terms of its timing] is a more powerful factor than the historical data,” adds Romera. Nevertheless, the rising cost of insurance is compensated for, to some degree, by this psychological effect. It also has repercussions on the company’s image and its promotional campaign, which becomes more effective if it is easier for the public to recall the country’s previous victory.

Moreover, previous success can help motivate people to consume more and have greater trust in these types of campaigns, experts say. When Media Markt fulfilled its promise in 2008, it had twice as much impact in the media because when Spain won its quarterfinal match that year, Media Markt launched an advertising campaign with the words, “We have won; look how we refund your money.” In 2010, Banesto promised that it would raise the interest rate it was paying on savings accounts by one percentage point if Spain won the World Cup. Ultimately, the victory of the Spanish team that year cost Banesto some 15 million euros. However, Banesto managed to capture about 1.5 billion euros in new deposits as a result of this campaign.

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Why Soccer Defies the Odds — Even for Oddsmakers." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 10 July, 2014. Web. 20 December, 2014 <http://knowledge.wharton.upenn.edu/article/soccer-defies-odds-even-oddsmakers/>

APA

Why Soccer Defies the Odds — Even for Oddsmakers. Knowledge@Wharton (2014, July 10). Retrieved from http://knowledge.wharton.upenn.edu/article/soccer-defies-odds-even-oddsmakers/

Chicago

"Why Soccer Defies the Odds — Even for Oddsmakers" Knowledge@Wharton, July 10, 2014,
accessed December 20, 2014. http://knowledge.wharton.upenn.edu/article/soccer-defies-odds-even-oddsmakers/


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far