Picking soccer winners

Backing winners is a game governments play as well as gamblers. The World Cup is a chance to see which succeeds.

The relative merits of markets and governments is one of the perennial points of debate in political economy. Frederick Hayek, of the Chicago school of economics, stressed the market’s superior ability to process information. (Actually, the point had already been made by Adam Smith; but Hayek made it even more clear.) One single piece of information -- the market price -- embodies gigabytes of information possessed by millions of economic agents. A central planner may be able to correct for a variety of market imperfections, but it will never even come close to processing the same amount of information as a market does.

The current soccer (or football) World Cup provides an interesting test for the informational efficiency of central planning and the market when it comes to ranking teams. FIFA, soccer’s highest authority, created its own system, which can be seen as an analogy for central planning. Based on information from all games played by each national team, FIFA’s computer model produces a country score. The ranking of country scores is then used to seed teams and for other purposes. FIFA ranks Brazil as number 1; but other than that, the results of the centralised computer model are highly debatable.

An alternative way to obtain information on the relative value of each team is to look at betting, which here corresponds to the market. Ask any bookie the odds that a particular team will win the World Cup and you can trust his answer will provide a pretty good estimate of that team’s strength.

The World Cup provides an interesting test because FIFA’s and the market’s rankings, while positively correlated, are actually quite different. In 11 of the 48 games of the first phase, the two rankings yield opposite predictions. For example, the central planner predicted that on June 12th Japan would beat Australia; the market, in turn, correctly predicted a win by Australia. FIFA also predicts that the US will beat Italy on June 17 and The Netherlands will top Argentina on June 21. We shall see.

The real test, however, will be during the knock-out phase. Which teams will reach the quarterfinals? Judging by the top eight teams in each ranking, the market predicts Germany, Argentina, England, Italy, Brazil, Netherlands, France, Spain. FIFA’s ranking, in turn, predicts Brazil, Czech Republic, Netherlands, Mexico, Spain, US, Portugal, France. Out of eight teams, there are three differences. The market says Argentina, England and Italy will be there; FIFA says it’s the Czech Republic, Mexico and Portugal.

Who will win, the market or the central planner? I can’t wait to find out.

Luís Cabral is professor of economics at Leonard Stern School of Business at New York University