08 June 2010

World Cup Predictions: Got Skill?

Predictive "skill" refers to the ability to make forecasts that outperform some naive baseline. A seasonal climate forecast has skill if it improves upon expectations derived from long-term climatology, a managed mutual fund has skill if it outperforms an index fund, a World Cup prediction has skill if it improves upon a simple way of generating forecasts.

In this competition I am going to employ two naive methodologies. The first is simply to take the FIFA ranking as the basis for deciding the winner of each game. This results in Brazil as the champion, with Spain as runner up. In the ESPN bracket, the rankings are conveniently provided next to the team names. Were you to come from another planet and have no knowledge of soccer, you should do no worse than a forecast generated naively by looking at the rankings. After all, the rankings are supposed to say something meaningful about relative team strengths. This entry is called Naive.2-FIFAWorldRanking in RogersBlogGroup.

I am also using a second naive methodology, which is based on the estimated player value of each national team.

South Africa 35 M€ Argentina 390 M€ England 440 M€ Germany 305 M€
Mexico 95 M€ NigĂ©ria 115 M€ USA 55 M€ Australia 40 M€
Uruguay 145 M€ South Korea
50 M€ Algeria 55 M€ Serbia 185 M€
France 450 M€ Greece 100 M€ Slovenia 45 M€ Ghana 115 M€
TOTAL 725 M€ TOTAL 655 M€ TOTAL 595 M€ TOTAL 645 M€

Holland 280 M€ Italy 400 M€ Brazil 515 M€ Spain 565 M€
Denmark 85 M€ Paraguay 90 M€ North Korea 15 M€ Switzerland 115 M€
Japan 70 M€ New Zealand 15 M€ Ivory Coast 180 M€ Honduras 45 M€
Cameroon 140 M€ Slovokia70 M€ Portugal 340 M€ Chile 85 M€
TOTAL 575 M€ TOTAL 575 M€ TOTAL 1050 M€ TOTAL 810 M€

Values in M€ (millions of Euros)

The forecast based on team worth is named Naive.1-TeamWorth, and it has Spain over Brazil in the finals. It is a bit more sophisticated than the FIFA World Ranking to be sure, but it is still a fairly naive metric for forecasting.

I have also entered into the mix forecasts generated by three big financial firms: Goldman Sachs (Brazil), JP Morgan (England) and UBS (Spain). (That previous sentence may provide you with all you need to know to remove all your investments handled by JP Morgan;-) These forecasts can be found from links here. As you can see, they spent considerable effort in making these forecasts, using fairly sophisticated methods akin to ones used to guide their investment decisions. These sophisticated methods should outperform the naive methods, if they are to any value.

Do you think you have skill? Can you beat the big investment banks? Sign up here!