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Saturday, June 12, 2010

Quantitative analysts take on the 'Beautiful Game'

Special to The Japan Times

HONG KONG — Sepp Blatter and the Federation Internationale de Football Association (FIFA), the organizers of the World Cup, had better watch out — the quants have arrived and have put their infamous models to work in predicting the outcome of the World Cup that has just kicked off in South Africa.

Quants is shorthand for quantitative analysts, referring to the small group of mathematics wizards who took supercomputers and crunched numbers to predict the outcome of stock and bond markets. They almost took over and destroyed Wall Street. Now they have their eye on the World Cup.

One of the beauties of soccer is its unpredictability. After all, if economic power and soccer power were related, then the United States, Japan, China and Germany would be the major contenders. If it were based on the numbers of males between 15 and 34, the active ages for soccer players, then China (424.5 million) and India (423.9 million) would have the field to themselves, but neither qualified for the finals in South Africa.

Soccer is also replete with statistics, starting with FIFA team rankings (showing Brazil leading Spain, Portugal, the Netherlands, Italy, Germany, Argentina and England, with Japan 45th) to player rankings, market values of players and teams, past World Cup performance — only seven countries have won the 19 World Cups to date, with Brazil winning five — and hosts of other relevant and irrelevant statistics. Enter the quants to crunch the numbers.

Several household name banks, among them Goldman Sachs, JPMorgan Chase and UBS, have published glossy guides to the World Cup, at the end of which they predict the outcome.

To be fair to the often-maligned Goldman Sachs, Jim O'Neill and his team have produced an informative, sometimes amusing guide to the games, including economic profiles of each of the countries in the final 32 plus Ireland, which should have been there. It also includes a 2010 "Dream Team" chosen from all the World Cup squads. (Buffon, ITA; Lucio, BRA, Alves, BRA, Terry, ENG and Ashley Cole, ENG; Kaka, BRA, Xavi, ESP and Ribery, FRA; Messi, ARG, Rooney, ENG and Ronaldo, POR.)

Goldman's 70-page guide also includes a selection of quotes that help to explain why soccer is the "Beautiful Game." Pope John Paul II, himself a former goalkeeper, said, "Among all unimportant subjects, soccer is by far the most important."

To Pele, the fabulous Brazilian star, "Soccer is like a religion to me. I worship the ball, and I treat it like a god. Too many players think of a soccer as something to kick. They should be taught to caress it and to treat it like a precious gem." Bill Shankly, the former Liverpool manager, whose ashes were scattered on the Anfield pitch, said, "Some people think soccer is a matter of life and death: It is much more important that that."

The Goldman book puts the UBS flimsy 40 half-size pages into the shade. UBS admits that "forecasting soccer (is) more art than science." The Swiss bank won international headlines when it correctly forecast that Italy, with outsider status among so-called experts, would win the 2006 cup. But in the 2008 European championships, the UBS model fell flat and its forecast winner, the Czech Republic did not even survive to the second round.

UBS has learned a lesson: "The moral of this story is that one needs to be humble about the predictive power of one's models. Successful forecasting can often depend as much on luck as on skill, which is a lesson that is too often forgotten when it comes to quantifying the future. Take (our forecast) with caution and a pinch of good humor. After all, soccer is only a game (in most countries)."

Goldman Sachs says it has "combined official FIFA rankings and odds from a number of different bookmakers to create a probability model that also penalizes teams according to how tough their schedule is on average." It admits that, "Our model-probabilities are intuitive to a large extent."

Only JP Morgan Chase comes out with full faith in the quant method. Its 69 pages of dense analysis make no concession to views about the beauty of the game or the state of the economies of the countries competing or any extraneous human factors.

It's almost as if Morgan is trying to rehabilitate quants through the World Cup.

Its research paper begins uncompromisingly sternly: "Quant Models are mathematical methods built to efficiently screen and identify stocks. They are based on information and data (analyst upgrades, valuation metrics etc) proven to help predict stock returns. Having developed a rather successful Quant Model over the years, we intend to introduce it to our readers and also use its methodology to apply it to a fruitful field for statistics: Soccer and the World Cup.

"In this Model, we focus on market prices, FIFA Ranking, historical results, our JP Morgan Team Strength Indicator etc to come up with a mathematical model built to predict match results."

The number crunchers all reach the same conclusion — that Brazil is the strongest team. The JP Morgan model puts Brazil on top of the world with a score of 1.68 followed by Spain with 1.53, with England trailing far behind on 0.91 an the Netherlands in fourth place with 0.63 and Argentina fifth with 0.48. Japan languishes in penultimate place on minus 0.96 just ahead of North Korea.

There is a twist. The bookmakers give odds of 4-1 for Spain, followed by Brazil on 9-2. UBS tips Brazil to win. Goldman tips Brazil with a 13.76 percent probability, followed by Spain 10.46 percent.

JP Morgan predicts that England will win because it has a better fixture schedule, with Spain second and the Netherlands third.

Kevin Rafferty started reporting soccer for the Oxford University newspaper Cherwell, covered a European Cup Final for the Financial Times and wrote regularly for the FT and The Observer. He stopped writing about soccer after the first million-dollar soccer transfer spoiled the beauty and the fun.

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