We’ll hand this to Wall Street’s best and brightest: they don’t give up.
In the last week, the Financial Times Alphaville blog has pointed to two investment bank reports predicting the winner of next month’s football World Cup. Bookies are sure to place their bets too, but the odds they offer aren’t what banks boast: “mathematical methods built to efficiently screen and identify stocks”, a “focus on market prices...historical results”.
Now, where have we heard this before? Since quantitative models that put too much stock on historical trends did so well in predicting the worst financial crisis in 80 years, it will be interesting to see how they account for Black Swans (high- impact, low-probability events) this time. Do these models factor in, say, a team’s playmaker headbutting an opponent? Zinedine Zidane’s freak act changed the nature of last World Cup’s final.
Perhaps banks are starting to get modest about foretelling human behaviour: JPMorgan advises a “pinch of salt”. Otherwise, they could find out that the wrath of financial markets pales in comparison with that of football fans.