For Germany and Argentina, a World Cup Loss Could Mean a Stock-Market Dive

Losing a major soccer game hurts the self-esteem of a nation so much that it affects investor moods.

Brazil fans watch the World Cup semi-final match between Brazil and Germany.
National Journal
Matt Vasilogambros
July 11, 2014, 6:06 a.m.

As if there wasn’t already enough pres­sure on the Ar­gen­tine and Ger­man na­tion­al teams in the World Cup fi­nal on Sunday, here’s more: A loss could hurt their en­tire eco­nom­ies.

That’s the latest warn­ing from Alex Ed­mans, a pro­fess­or at the Lon­don Busi­ness School and the Whar­ton School of the Uni­versity of Pennsylvania, on Fri­day. The pre­dic­tion comes from his 2007 study in the Journ­al of Fin­ance that found a link between World Cup losses and sharp de­clines in the los­ing coun­try’s stock mar­ket the fol­low­ing day. Ed­mans’s study used 1,100 soc­cer matches from 1973 to 2004 from the World Cup, the European Cham­pi­on­ship, Copa Amer­ica, and the Asi­an Cup.

For many coun­tries around the world, soc­cer is a na­tion­al in­terest, tied to the self-es­teem of its cit­izens. Soc­cer af­fects people’s moods, and a win or a loss means that people feel bet­ter or worse about them­selves and life in gen­er­al. For in­vestors, their moods have been shattered so much by the soc­cer game that the mar­kets in turn go down.

Ac­cord­ing to Ed­mans’s study, elim­in­a­tion from a ma­jor in­ter­na­tion­al match saw a 38-point de­crease in the los­ing coun­try’s stock mar­ket. A loss in the World Cup, however, is much more pro­nounced, with a 49-point de­crease the day after a loss. And that’s just an av­er­age of all elim­in­a­tion games (Round of 16, Quarterfi­nals, Semi­finals, and Fi­nal). A loss in the World Cup fi­nal would mean a much high­er stock-mar­ket loss.

“It is hard to ima­gine oth­er reg­u­lar events that pro­duce such sub­stan­tial and cor­rel­ated mood swings in a large pro­por­tion of a coun­try’s pop­u­la­tion,” the study notes.

Ed­mans’s the­ory is already play­ing out in this World Cup. After los­ing big to the Neth­er­lands in the open­ing game, Spain’s stock mar­ket de­clined by 1 per­cent, while the world mar­ket in­creased by 0.1 per­cent. After a ma­jor loss to Costa Rica this tour­na­ment, Italy saw its mar­ket dip by 1.5 per­cent as the world mar­ket re­mained un­changed. The Neth­er­lands’ stock mar­ket fell 1 per­cent after its loss to Ar­gen­tina on Wed­nes­day. Over­all, 25 of the 37 de­feats this year have pre­ceded de­clines in the los­ing coun­tries’ stock mar­kets, Ed­mans notes.

So if losses cause eco­nom­ies to tem­por­ar­ily tumble, wins should res­ult in big, im­me­di­ate gains, right? Not quite. After a na­tion wins a World Cup game, its stock mar­ket in­creases by just 9 points on av­er­age. That’s be­cause people are more swayed by losses than gains, ac­cord­ing to the eco­nom­ic the­ory of loss aver­sion. Ba­sic­ally, people are more af­fected by los­ing a dol­lar than win­ning a dol­lar. The same can be said for World Cup games: People would rather not lose than win.

In many coun­tries, soc­cer is a way of life, a “re­li­gion” to some. When it comes to match out­comes, it’s also ap­par­ently an eco­nom­ic in­dic­at­or.

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