Saturday, February 2, 2008

Handicapping: Money Management Fundamentals

It has been often stated that knowing how to bet is more important than knowing what to bet. Of course that is a bit disingenuous, but after playing this game for many years I agree with it on principle.

Jeff Platt from Jcapper has a very good handicapping article on his website entitled The Sphere. Here is what he says about money management:

I’ve made no secret of the fact that my game is based around backing UDM [i.e. spot plays available to his software users] plays to win their races and that I play to a bankroll. One of the primary goals I have when I play is growing a small bankroll into a large one. Unless you are just extremely lucky the task of actually doing this takes an incredible amount of willpower. The reality is that without discipline the act of growing a small bankroll into a large one over an extended period of time is nearly impossible. Along these lines I suggest that the inexperienced player start out by going through the exercise of simply flat betting UDM plays just to get experience. After proving to yourself that you have the ability to bet UDM plays while betting nothing else, and do it profitably - then and only then try making each bet within the context of each bet being part of a bankroll. Trust me, there is no other way. Until you try you simply won’t believe how hard it can be sometimes to play a perfectly clean race day- a day where the only bets you make are UDM plays and where each bet is made at your intended percentage of bankroll.

In my experience, as we discussed a little bit below on losing streaks, a good deal of handicappers, old and new alike, are a little perplexed when speaking and learning of money management. It is like it is some weird thing that others do. It is not. We’ll try our best here to help. This will be a different piece, as well, than you usually see in handicapping books. In the second part, we will talk about money management for a newer player, or a player who wants to get better, and still enjoy the game. Most won’t touch that and it will be explained why below.

First, let’s start with an axiom which is non-negotiable, one which Jeff alludes to above. If you are a negative ROI player, money management can not help you. If you are making a bet, you need an edge, and this edge has to be positive to make the bet. If you are making a bet on a slot machine it has a negative expectation – the house always wins. If you play the slots game with betting theory, you would never make the bet.

This is why keeping track of your wagers is most important. If you do not keep track, you can not figure out your edge, and you can not properly bet size. If you do however keep track, figuring out optimum bet size based on that edge is easy. The Kelly Criterion is accepted by virtually every gambler as being accurate. It is fractional betting, not flat betting, and fractional betting involves betting your edge. If your edge is high you bet more. If your edge is low you bet less.

It works like this. You have tracked 100 bets of 3-1 shots and on these , you bet $200 and got back $230. Your ROI is 15%, or 1.15. You have a 15% edge. Now how much should I bet?

Using Kelly you divide the edge by the horses’ odds. For a 3-1 shot, for example it is 15%/3 = 5%. That means that you should bet 5% of your bankroll on this bet. If you have a bankroll of $1000, you would bet $50 to win. Most handicappers (like mentioned in the Alan Woods article that he said he did) bet fractional Kelly, 2/3rds, or one half. So if you bet with Half Kelly you would bet $25 to win. Betting half Kelly is something that helps preserve your bankroll. If you had a 50% edge and a very short shot you would be betting most of your bankroll. That is never a good thing, so half Kelly is a good thing I believe.

Now with this system you can see how it preserves your bankroll. Here is an exercise to show how: Notice what happens if you have a longshot? Let’s say your records show that on 15-1 shots (give or take 5-1) you have made a 15% ROI; then 15%/15 is 1% of bankroll. This is crucial – according to this method you do not bet the same amount on longshots as short shots. If you do, you tend to go broke, simply because the hit rate is so low. When you think about it, it does make perfect sense. I could sit here betting a flat $50 a race, with a $1000 bankroll. If I was betting 40-1 shots I might not hit a bet in 50 or 60 or even 100 or 200 bets. My bankroll would be dust before I hit one. If I was betting a flat $50 to show on 1-5 shots, conversely, I could obviously last quite awhile. This helps us survive when betting horses of different odds levels. When your hit rate is high (eg betting chalk) you can bet more, when it is low (eg betting bombs) you scale back.

The Kelly Fractional technique is generally accepted. It takes tremendous discipline however, but if we want to be better players, rather than weekend gamblers it is a lesson well learned.

Another similar method that I advocate and have been sold on, is unit betting, to figure out bet size. Stanford Wong (an associate of Alan Woods, actually in his card counting days) advocated this in his book Betting Cheap Claimers. This is how it works. You pick a number you want to win and that is your “unit”. If you want to win $100 (one unit), you can bet $100 on an even money shot (bet $100, make $100; or bet a unit to win a unit), but on a 9-1 shot you would bet $100/(odds+1) which would be 100/10 which equals a $10 bet - you would be betting 0.10 units to win a unit. This has a similar bankroll preservation result, which is what we’re after. A lot of very, very good players use this method. Wong in the book advocates that this unit betting should be used for those choosing paper bets to test their plays. I agree. If you want to try that, pick $100 as he does, and then test over a few hundred races - that is only ten days at three cards a night, and see if you come out on top. If not, go back and see what you did wrong, and so on. Soon you will see if you have a chance to have a positive ROI based on your betting angles.

We will discuss next time, what number to pick with this fractional betting idea. It is not arbitrary, it is based on bankroll size.

So there you have it - a primer on bet sizing. This does not mean much to those of you who are just starting out, or who want to try and beat the game with a bankroll, who have emailed asking about bet size. Several of you do not know your hit rate, or are playing with small bankrolls. To solve this, most books I have read seem to say “paper bet” and just experiment (like using the Wong strategy above) until you know your hit rate and edge. This is good advice of course, and I encourage it! But let’s face it, some people don’t have time and they are betting for entertainment, and just want to get marginally better. Everyone seems to want to play with real money and learn on the fly. We’ll step out of the conventional and look at that in Part II in a step by step way of becoming a regular player. It will take us through setting up an account, the bankroll, record keeping, bet size and avoiding ruin.


Anonymous said...

Another good post!

Wind Gatherer said...

Questions about hit rates and "the edge".

In order for me to figure my hit rate with 15-1 shots or whatever, do I need to paper bet every 15-1 shot I see or just the ones I like? If my handicapping keeps pointing me to the shorter priced horses, how do I then figure the longer priced ones?

Is it a function of just making the odds line for every race and whenever a horse is an overlay, making a paper bet on him and then keeping track of all those outcomes?

Pull the Pocket said...

It takes time. If you keep track of your bets you can see how you do at different odds levels. The longest shots are the hard ones, but you can see it over time and make an estimate.

Say you bet a certain type negative (that the public thinks is negative) horse on the turf that yields some prices that you like. If they are 20-1 and wins at a decent hit rate and you have an edge, well you would obviously bet more the larger the edge.

Longshots are really hard to predict though, so you have to be careful. A 5% hit rate says that 20-1 should be alright, but over time how do we really accurately know? Maybe the horse is really a 30-1 fair shot, which is a 3% or so hit rate which is very close to 5%. Generally with horses over 15-1 that I think I have an edge with I bet about 0.4% of my bankroll. That works for me and keeps me sane.

With shorter shots this does work well though - i.e. Kelly. Having a horse that hits at 40% of the time that is 33% (2-1) on the board is the bread and butter of these plays. You have to bet more on those ones of course.

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