Monday, June 11, 2012

Betting in the European football cup

I was talking to some fiends the other day about the European cup tournament currently under way. My friends had their own favorite teams and their own theories as to which team would come out on top. To that effect they placed several bets. Nothing too serious...the sum placed in each case was limited to two digits, however the promised payoff (if the bet was successful that is) was hefty!

Last night during a discussion with my dad, he revealed that it was England's time to win the cup and that such a bet had nine to one odds. This got me thinking. Is it possible that people are becoming more risk lovers?

I have talked about how people change their spending behavior due to the financial crisis in a previous post. Also, I discussed how people's marginal utility of money has increased. Financial theory suggests that the greater the risk associated with a specific investment, the greater the expected return. So if people know that there is a high risk of loosing money on an investment (in the fore mentioned case, a bet) then they expect that if the investment is successful in the future, they will receive a high payoff.

There are two types of investors, risk lovers and risk averse. Risk lovers like risk and they expect that their investments will pay up a hefty amount in the future. Risk averse investors are more down to earth. They avoid risk where possible and they expect lower payoffs from their investments.

Looking back to the whole betting idea it seems that people are avoiding "the sure result". Spain is the favorite of winning the cup, however, nobody will bet on Spain because the payoff is low. In other words it is not worth the trouble or the money investing in Spain. People are betting on teams that they believe are capable of winning the tournament, and are also promising high payoffs.

Now, one could argue that this has always been the case and that the crisis has no impact on the risk taking of people. I respectfully disagree. People are now more careful with investments. They will only invest if they see a satisfactory expected payoff in the future. And since the marginal utility of money has increased, so do the expected payoffs. But these higher payoffs accompany riskier investments.

Which is your favorite team and how much are you willing to bet that it will win the European cup?


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