One prediction that Goldman Sachs got wrong

Predicting match winners is mostly considered a fool’s errand, except Paul the octopus whose predictions in the 2010 edition of the soccer Wold Cup got him world-wide attention. With Germany drubbing Brazil 7 – 1 in the first semi final of The FIFA World Cup 2014, Goldman Sachs’ prediction that the hosts will win the finals has been proved wrong – though not completely.

The model favoured Brazil to win the World Cup, with Argentina and Germany next most favoured but much lower down in probability. However, the model correctly predicted that Brazil, Germany and Argentina will reach the semi finals. It also predicted Spain to enter the semis.

Even before the event kicked-off in June, Goldman Sachs, in a report titled The World Cup and Economics 2014, had predicted that hosts Brazil were the clear favourites to win the cup. In fact, they also selected The World Cup 2014 Dream Team! The 19 FIFA World Cup tournaments have been won by eight different national teams. Brazil has won five times and was the only team to have played in every tournament.

For this prediction, Goldman Sachs constructed a stochastic model that generated a distribution of outcomes for each of the 64 matches of the 2014 World Cup, from the opener between Brazil and Croatia on June 12 in São Paulo through the final on July 13 in Rio de Janeiro.

The predictions for each match were based on a regression analysis that used the entire history of mandatory international football matches—i.e., no friendlies—since 1960. This gave about 14,000 observations to estimate the coefficients of the model.

“Of course, it is hardly surprising that the most successful team in football history is favoured to win a World Cup at home. But the extent of the Brazilian advantage in our model is nevertheless striking. Our probability for an overall Brazil win is almost 50%, versus 25% for Ladbrokes bookmakers,” the report said.