Value, probability and risk

Successful gambling is all about being able to beat the market in assessing what is the true price of an event occurring.

If you can consistently get odds that exceed the right price then you are going to win. The better you get at figuring out what the price should be, the more accurate your ratings are and the better off your betting balance will be.

If your goal is to be a successful punter then you must have a very clear idea of the concept of value. That sounds simple enough but putting the theory into practice is what most punters have difficulty with. Figuring out exactly what the odds of a particular horse should be involves weighing up the relative importance of many different form factors for many different horses. That’s no easy task as it requires a mix of quantitative (data) and qualitative (subjective) analysis. More about decision making and the psychology of risk assessment later, but right now it is essential to understand that value can be almost any price. Odds-on can be value and big odds can be terrible value. Two quick examples: (1) Odds of $1.10 that there will be at least one rainy day in Melbourne in the next 12 months (2) Odds of $101 that Gai Waterhouse won’t train a winner in the next 12 months Number (1) is mortgage your house value at $1.10, whereas number (2) is about the worst unders you could take despite the fact you were getting $101. So clearly it’s not the price itself that dictates whether something is value, it’s the likelihood of an event happening relative to those odds. To further demonstrate this we will go back to the trusty old favourite of the coin toss: $2 is a fair price, $2.20 is good value and $1.80 is unders. A massive problem in trying to assess value prices for horse racing is that numerous studies show that the vast majority of people are quite woeful at assessing probabilities, yet they over-estimate their own ability to do so. Then we have risk. A study by psychologists Daniel Kahneman and Amos Tversky analysed the processes people used to make decisions that involve risk. They won a Nobel Prize for their efforts in demonstrating people’s attitudes towards risk aversion and also risk seeking. In one example, people were given a choice between getting $1000 with certainty, or having a 50% chance of getting $2500. Most chose the certain $1000 in preference to the 50/50 possibility of getting $2500. This is despite the fact that the mathematical expectation of the uncertain option is greater ($1250). This is often described as risk-aversion. But Kahneman and Tversky also analysed risk seeking behaviour. When the same people were confronted with two options: (1) a certain loss of $1000 (2) 50% chance of no loss or 50% chance of $2500 loss Most chose option (2) which is the riskier alternative. So risk aversion and risk seeking are important considerations, while the ability to accurately assess probability is notoriously difficult. Which brings us to the question – what are the personality traits common amongst winning punters? The people who are most successful at assessing probabilities are invariably highly disciplined, very hard working and comfortable working with numbers. Studies have also shown that many successful gamblers don’t get a huge emotional buzz from winning, nor do they have big lows when losing. What does happen is they dislike losing so much that they work even harder than previously to improve their approach and get back to their winning ways. Next week we’ll take a look at some specific angles showing you where to find pockets of value when doing the form. Good punting David Duffield