• How Much Should You Bet?

    POSTED Dec 13, 2013
    For as long as I can remember I’ve heard (some) bettors lament their lack of “money management” skills.

    “My handicapping is fine,” these punters say, “but my money management stinks.”
    Generally, I file these comments with others that I’ve found to be equally insightful over the years. Comments like:
    “The day you take complete responsibility for yourself, the day you stop making any excuses, that's the day you start to the top.”
    ~ O.J. Simpson
    “I tripped and fell into a lifeboat.”
    ~ Capt. Francesco Schettino 
    “It’s not the first hooker that I’ve helped out... I was being a good Samaritan.”
    ~ Eddie Murphy
    “I had an adverse allergic reaction to some medication.”
    ~ Charlie Sheen
    Yet a recent betting challenge that I conducted changed my mind about the importance of money management — at least in part.
    The object of this proposed month-long challenge was to compare and contrast straight (win, place, show) and exotic (exacta, trifecta, pick-3, etc.) wagering approaches. However, due to excessive whining about the races/tracks I chose for the contest, I decided to end the “festivities” after just four days, thereby preserving what was left of my sanity.
    Consequently, not much was gleaned in regard to the two different betting approaches (straight vs. exotic), but I did learn a ton about bet planning.
    Most — if not all — of the challenge participants were seasoned players, yet few of them, it seemed to me, had a coherent strategy or plan relating to bet sizing and/or capital growth.
    One guy, a self-proclaimed professional gambler, lost over half of his mythical $1,000 capital (the amount everybody started with) in two days! On the other side of the extreme, another guy was making $2-$6 bets each race.
    Now, if one is just playing around, it’s OK not to have a betting plan — far be it for me to suggest that grandma needs to be optimizing her bets on the prettiest horses; but if one is trying to make money at the racetrack, some type of bet optimization strategy is essential.
    Among the most well-known bet optimization methods is the Kelly Criterion. Named after its inventor, John L. Kelly of AT&T Bell Laboratories, the Kelly Criterion is a formula designed to boost betting profits by determining the ideal percentage of capital to be staked on each wagering event.
    The formula is as follows:
    Wager Amount = (winning rate - losing rate / avg. winning odds) x bankroll.
    (Note: Remember your order of operations — division before subtraction.)
    Hence, if one typically wins 1/3 of his/her bets and they pay $7 on average, the amount wagered to optimize profits would be approximately 6.67 percent of capital (1/3 – 2/3 ÷ 2.5 = 6.67 percent).
    Because there is such risk of tapping out if one overestimates his/her true advantage, most bettors will use a fraction of Kelly to determine their stake (and some will adjust it based on the post-time odds and their perceived advantage). In the Challenge, I used a modified Kelly number and assumed losses in each race, which allowed my daily wagers to be an equal amount and protected me — as much as the formula allows — from  a rash of misfortune (my clever euphemism for “losers”).
    Related to bet sizing is a plan for capital growth. Among the most illuminating things said in regard to the Challenge was this (by a good Facebook friend):

    “Although four days is a small sampling, it's a sampling nonetheless. Neither straight or exotic wagering is producing substantial results. That could change, but again, the four days have sent us a message.”
    Sadly, I have a feeling that the sentiments above are shared by the vast majority of horseplayers — and they reflect a complete lack of understanding as to how bankroll appreciation occurs.
    Take, for example, my own Challenge results. In four days, I accumulated the following stats:
    Races Bet: 10
    Winning Bets: 6
    Success Rate: 60.0%
    Total Bet: $429
    Total Return: $468.45
    ROI: +9.20%
    Avg. Odds: 0.82
    Kelly Advantage: 0.6 – 0.4 ÷ 0.82 = 11.22%
    These numbers were a bit skewed by a (negative pool) show bet, which returned just 15 cents on the dollar, and — as I was constantly reminded of — chalky results in general. But the figure that undoubtedly prompted my friend’s post was the $39.45 in winnings — in four days.
    On the surface, such a miserly return is hardly worth the effort. However, when one has a betting optimization plan, small profits like this are perfectly acceptable — and, in fact, a nine percent ROI is fantastic.
    With help from www.winnergambling.com, I computed my bankroll growth rate based on the stats above:
    (Click on image to enlarge)
    What this means, in less esoteric terms, is that if I were to maintain an ROI in the 9-10 percent range and average the 2 ½ plays a day I did in the Challenge for an entire year (365 days), my $1,000 bankroll would grow to over $25,000 by the time the first strains Auld Lang Syne” could be heard.
    I say “theoretically” because the actual figure would be a quite bit less than this due to the escalating bet size over the course of the year — which could affect the payoffs and, hence, my Kelly edge at smaller tracks.
    Of course, the answer to this is simple: a maximum bet size (which could be altered based on the mutual pools one is wagering into).
    Using the example above, if I capped my bets at, say, $300, the initial $1,000 bankroll would still exceed $17,000 by year’s end.
    Hardly insubstantial.
    So, if you’re serious about making money at the track, consider using some of the tools discussed herein to help you meet your goals. And don’t be swayed by those who can’t see the forest for the trees… or the potential in paltry profits.

    Dave Schwartz said...

    Dang, I wish I could write with your level of cleverness! I am lucky to come up with one witty comment per post.

    Going past my obvious envy of your writing skills, I think your content was dead-on.

    Everything from the part about how tough it is to make $17,000 in a year... the key is clearly MORE plays rather than MORE profitability - not that profitability is a bad thing.

    Dave Schwartz said...

    ...oops. Hit enter too soon.

    ... to the part about how most people have no plan at all.

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