Paul the Octopus and Economic Theory
| Date: July 9, 2010 | Source: Sources |
| Category: Trivia | |
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Loading ... Paul the Octopus has spoken: Spain will win the final of the football World Cup!
Imagine you have $ 1,000 and wants apostarlos a result of the final. What economic theory tells us about how to proceed? The case has a curious parallel with the gestation of the bubbles. Your decision should depend on one of these three hypotheses:
- H1. You think Paul the Octopus really knows the future.
- H2. You think Paul the Octopus does not know the future, but also believes that many people do trust the octopus.
- H3. You think Paul the Octopus does not know the future and also no one believes him, just about entertainment media.
In the first case, the answer is clear: $ 1,000 bet their prediction following the octopus!
In the second case, the theory tells us ... that we bet on the contrary to his prediction. The ticket price of a bet in Spain - Holland gathers all the added information available on the outcome of the game (such as game systems, results, experience or fitness level each team). Like it or not the prediction, we must remember that betting markets are the best predictors we know (must-read article). If many people rely on the prediction of the octopus and you do not, your best strategy is to bet against, because these people will have added this new information (the view of Paul) in the price. That is, the price has moved away from their perspective, their fundamental value. The curious thing is that what for you is a bubble, not for those who trust in the octopus. For them there is no bubble. "The housing prices never fall." Sorry!, My head has been another issue. "The octopus has guessed all the results of Germany in the world."
In the third and last case, the opinion of the octopus does not matter to anyone, so no "false" information is added in the price bubble there to exploit. Does that mean you should not bet on any team? It depends: if you are a football fan you could earn value "covering" against an undesired result. Holland's victory is paid at this time to 3.35. Ie, bet (if Spanish) in favor of Holland. If Spain loses ... relieve their displeasure with 3,350 €! Anyway, hope of reward, in the absence of insider trading, was zero.
You now have all the necessary information to bet. Decide which of the three scenarios is relevant to you. But before you think, Paul the octopus has successful outcome of the six games he has played in this World Cup Germany (including the defeats against Serbia and Spain). The probability that what has been achieved by chance is equal to 0.5 raised to 6, about 1.5%. Are you sure that Paul does not know the future?
