How Brexit Caught Investors and Oddsmakers Off Guard

A London-based investor was on an airplane heading home on the night of June 23 when the pilot announced that the U.K. had voted to exit the European Union. Cheers went up in the back of the plane. The passengers sitting around him in business class groaned.

The difference in reaction might well explain why markets got it so wrong in predicting a Remain victory. Traders and investors were so confident about voters’ intentions to stay that they bought global stocks in the week heading into the Brexit vote, driving up equity prices. On the day of the referendum, they sent the value of the British pound up to $1.50, its highest level of the year. What they didn’t foresee was that the Brits in the cheap seats—most of whom don’t own stocks—were serious about rejecting the status quo. The fact that markets didn’t accurately reflect that sentiment cuts to the heart of why they are imperfect predictors of the future, especially when it comes to political events like Brexit.