Betting odds are generated by the amount of money placed on each outcome, rather than by a sophisticated analysis. This is where it all went wrong for the bookies: their odds were biased towards ‘Remain’, because the average bet on this outcome was about six times higher than the average bet on ‘Leave’, according to Ladbrokes, a bookmaker.
The majority of fund managers speaking at Portfolio Adviser's sister publication, Expert Investor’s investor forums this year said they were confident the UK would vote ‘Remain’. And they more often than not pointed to the bookmakers’ betting odds to justify their opinion.
Simon Down, a fixed income fund manager at Nikko AM, was one of only very few investors to question the merits of the Brexit betting odds. “I’m very surprised that investors attached so much importance to the betting odds. I have had several interviews with bookmakers before the referendum and they all told me their odds are generated exclusively by the amounts of money placed,” he explained. “It’s really quite strange investors attach so much importance to those odds, considering the small size of the betting market.”
Moreover, Down believes the bookmakers’ odds have been a major factor for markets to price in a ‘Remain’ vote in the run-up to the referendum. “I thought the risk of a Leave vote was higher than the odds predicted by the bookmakers, though my base case was ‘Remain’,” he told Portfolio Adviser today. “But the bookmakers’ odds made it easier for investors to believe in a Remain vote, and I think that’s what happened.”
Don’t follow the money
As recently as last night, bookmakers’ odds implied a probability of up to 90% for the UK to stay inside the European Union. This is about the same chance that Ladbrokes’ odds for England winning the Euro 2016 football tournament next month imply.
“But the bookmakers’ odds made it easier for investors to believe in a Remain vote, and I think that’s what happened” - Simon Down
Ladbrokes’ head of political betting, Matthew Shaddick, conceded his Brexit odds hadn’t proven a reliable gauge for the outcome of the referendum.