EC One Lesson For Investors From Brexit And Trump Victory Missed By Most
Much has been said and written about the surprising results of Brexit vote in UK and Trump win in US Elections, their causes, and implications. However, there is an obvious and important lesson for those managing investments that has not received much attention.
The unexpected wins for Brexit in the June EU referendum in UK, and for Donald Trump and the republicans in November elections in US, and what these results mean for the economy and markets, have undergone a lot of discussions. These are very important and relevant topics. However, the implications of those wins are not the focus of this article. Rather, the focus is on examining the events from the perspective of investment managers, whose investment decisions are shaped by views formed from the information, opinions, and forecasts they receive from the media and the experts. The focus here is on the fact that in two of probably the most consequential events of the year, almost the entire world reached the wrong conclusion, and yet there was readily available information that would have pointed anyone, who took a slightly deeper look at the data rather than simply accepting the wide consensus view, to a better conclusion, or at least, not as certain a wrong conclusion.
On 23 June 2016, the United Kingdom voters defied the polling experts, betting odds and much of the political establishment, and surprised the world by voting 52% to 48% in favor of leaving the European Union. Most people had gone to sleep believing Remain win was a foregone conclusion. The surprise roiled the markets – within an hour of the announcement of the result, the Pound lost 10% of its value, US Treasury yields were down 30-35 basis points, and Gold price was up by $73.
With lack of clarity from polling results that were veering all over the place, markets were focused on probabilities derived from betting markets. Betting odds are assumed to convey the “wisdom of the crowds” and take into account a greater range of factors than the snapshot a poll will offer. The evening of the referendum, bookmakers (including U.K. bookmaker William Hill PLC and British bookmaker Paddy Power, part of Betfair Group PLC) placed the chances of a “Leave” vote at 10% or less. By Thursday night as the polls closed, Betfair was predicting a 94% chance the U.K. would vote to stay, and the pound reached its highest levels of the year against the dollar.
There was information out there from bookmakers that would have questioned the conclusion based on odds from them. But it seems like almost no one was looking for them as the opinion had been formed and consensus reached already.
Reports on June (ii) quoted spokesperson for the betting shop Ladbrokes saying that over 80% of the number of bets outside London were in favor of Brexit, even though Ladbrokes’ odds were in favor of Remain. Similarly, British bookmaker Paddy Power, part of Betfair Group PLC, said its odds skewed in favor of a vote to remain due to large bets. Graham Sharpe, a spokesman for William Hill, said 71% of bets placed with the firm are on a “Brexit — British exit — outcome, but 73% of all the money bet with the company is on the remain camp prevailing
Clearly fewer larger bets were skewing the odds in favor of Remain even though majority of bets were for Exit. Unlike a market were the size of purchases is important, in a poll or referendum, one person gets just one vote. Ladbroke publicly talked about the data before the vote and after the vote explained why the betting markets got EU Referendum results so wrong[iii] in a blog. If most of the cash went on Remain, as it did, bookies had to follow the money and make Remain the favorites. And the bookies all agreed that while three-quarters of the £40 million (not a very big amount in the scheme of things) eventually gambled on the referendum was placed on Remain, when it came to counting individual flutters, bets on Leave far outnumbered punts on staying in the EU.
Note: The views expressed are solely and strictly my own and not of any current or past employers, colleagues, or affiliated organizations. My writings are simply expressions of my intellectual thought process. The intent is not to promote any particular view point or agenda, and the writings are not influenced by any other groups or individual.
Note: The views expressed are solely and strictly my own and not of any current or past employers, colleagues, or affiliated organizations. My writings are simply expressions of my intellectual thought process. The intent is not to promote any particular view point or agenda, and the writings are not influenced by any other groups or individual.less