In the lead-up to the referendum on the U.K.’s continued membership in the European Union, certain British bookmakers were offering four-to-one odds on bets the U.K. would opt to exit, meaning they anticipated a mere 20% probability of a leave win. At the same time, both sides were running neck and neck in the polls, rationally implying around a 50% chance of a leave vote result. This opportunity to receive a profit equal to four times one’s initial investment on an outcome estimated to be 50% likely, while losing only one’s initial investment the other one time out of two was an obvious example of a mispriced bet. Similar to the U.K. bookmakers mispricing of the Brexit bet, the market occasionally misprices stocks, placing the odds either in favour of or against the investor.
Leave a comment