David Walsh and Zeljko Ranogajec rose from humble Hobart university students to become two of the most successful professional gamblers in history. Their betting group turns over literally billions of dollars each year.
Walsh is a fascinating character who, in 2018, shared some fantastic betting insights on the Good Life Podcast.
We’ve summarised the highlights below so you can learn:
“My experience of gambling taught me to understand that the wealth and prestige that I grew to possess had very little to do with my talent. I didn’t gain wisdom by standing on the shoulders of giants. I gained wisdom by surfing the crowd.
“We’ve done a lot of analysis on horse racing over the last 30 years. It took me years before I was able to generate a model that was more accurate than the public. Turns out it doesn’t matter how much analysis you do, how sophisticated you are, how much you know about regression and logistic regression…you end up with a model that is inferior to the public unless you include the public market as a factor in your model. So what you end up with if you’re actually going to win is a perturbation model that assumes the public is right but also finds the biases that they introduce. Things that in the psychology literature are called cognitive biases.”
“The ‘hot hand bias’ is an example. There’s a belief in basketball that someone who has had a great three-point percentage throughout the game is more likely to make a three-pointer in the last quarter than he was before. When, in fact, their lifetime average is the better predictor of the next outcome.
“Hot hand bias is foraging behaviour. It was once useful, this cognitive bias, but now in certain applications, it leads to misadventure.
“We get the odds mostly right but when there’s been a particular sequence, like a jockey has won a bunch of races, we might think they’re more likely to win the next race. We overweight trends.”
“If you back a favourite in a horse race you might lose 2 or 3%. If you back a longshot you might lose 40%. That’s preferred for two reasons. The first is for boasting rights because if you happen to get a winner it’s very useful and I believe that plays a big part, especially with men who exert this bias more than women. The second is non-linear utility. 1x $100 might be worth a lot more to you than 200x $1. Because $1 has no apparent purchasing value to you, whereas $100 does.”
“Punters tend to overweight the importance of the weight the horse is carrying. Don Scott was a gambling guru who published his system based around weight and a lot of people incorporated this ideal into their behaviour. He was wrong about it as a feature – it was never as relevant as he thought it was. But once you misdirect the wisdom of the crowd, they’re all over-playing this. As far as I know, this feature doesn’t exist in many markets.
“You get huge negative coefficients on weight if you include the public. You get huge positive coefficients on weight if you don’t include the public. Weight is relevant to the outcome but it is over-discounted by the weight of numbers.”
“The university in Hobart is just across the road from the casino. It does seem to have created quite a lot of serious gamblers. People wander across the road. I guess I was one of those.”
“You don’t need to forecast the outcome. A lot of people aren’t aware of this. What you need to do is simply get odds that are better than the public odds. I use a die analogy quite often…it doesn’t matter what number you bet on, if you can get 10/1 and it’s a fair die you’ll make money. If you get 4/1 you won’t make money. Every economist knows that but it isn’t universally known and it probably should be.”
“When we see a magazine interview of an ultra-successful Bill Gates-type they only look at the output cohort. They don’t look at the input cohort. I always use tennis as an example…there is no point in interviewing Roger Federer because all of the things he has done to make him good, the people who didn’t become good also did. It might seem incredible but most of his edge was a lucky retrospective outcome. He was slightly better than everyone else and there’s a feedback loop and he got better and better.”
“The first thing that successful investors do that is a discriminating factor based on being different from inputs (and I didn’t do this) is survival.
“When you have lost half your capital you’ve got to bet half the size. Because the biggest thing that can happen to you is destruction. The first thing you’ve got to avoid is ruin. And that applies to anything you do.”
“If you bet on the horse races there’s about 1 chance in 5000 it’ll destroy your life because you’ll become addicted.
“But if the first time you bet is on a poker machine there’s about a 5% chance that it’ll destroy your life.
“If you’ve never placed a bet, the best decision you can make is to never place a bet. If you’re ever going to place a bet, don’t do it on a poker machine because the ‘addiction-by-design’ clever bastards built them.”
“Success is only slightly correlated with talent.
“There were a lot of people including me who made really bad business decisions early on and got lucky. I over-estimated my edge and there was about a 20% chance of succeeding with my horse racing gambling. That’s not a good position to be in.
“There were a lot of other people like me that were just as talented at gambling and figured out the same strategies as me and made the same mistakes as me…but they got wiped out and I didn’t.
“And then of course once I’m in the market and successful, people like me make the characteristics of the market more untenable and more deceptive. So that the new players think they’ve got an edge, but are less likely to have an edge. And indeed they’re less likely to bet big with the edge that they have. So they’re more likely to blow up.
“30 years ago you could beat me but now you can’t. Because you’ll come in and you’ll find a way of getting an edge, you’ll bet too big. Or you’ll have deceived yourself about whether you have an edge in the first place and you’ll blow it up.”: