Risk Management (Variation)
In every video or article, we mention that when you invest in sports bets, and in particular value bets, you should do so with the intention of winning in the long run, not in the short term.
What is dispersion/deviation?
The variance is a measure of how far a set of numbers from their mean is distributed.
Numbers can be anything, such as people’s height.
Let’s take two groups of people, each with an average height of 1.80 m.
In the first group of people, all have approximately the same height, about 1.80 m, ie. one is 1.75m, another 1.85m, etc., and whichever one we take at random we will be sure is close to 1.80m.
The other group, however, consists only of very short and very tall people. And if we take someone again at random, it will be either very low or very high, although the average height of the group is 1.80 m.
Why is it important to be aware of the deviation?
The previous example can be replaced with investments and profits to understand why understanding and being aware of variance is key.
We have an investment of which we have a 25% chance of zeroing, a 50% chance of winning 100 units and a 25% chance of winning 200 units, of which we understand that the average expected value is 100 units.
For the other investment, however, we have a 25% chance for 99 units, a 50% chance for 100 units and a 25% chance for 101 units with the same average expected value.
As you can see, the deviation is much larger in the first investment, which makes it much riskier, but also with the potential for greater profits.
The lesson we can draw from this is that high profits border on higher risk and therefore variance = risk. And by reducing the deviation, we will have less risk, which we aim for.
Why the number of bets is important (the law of large numbers)
If you have read our articles or watched our videos for value, you have learned how to get the benefits of sports betting and that good bets are characterized by positive expected value. The question we will answer now is how to turn this advantage into long-term profits.
Let’s assume that we have a 5% advantage when tossing a coin, which means that bookmakers offer us a 2.10 odds for Ezi (2.10 / 2.00) – 1 = 0.05 x 100 = 5%.
With a bet of BGN 10, we have a potential net profit of BGN 11 and an expected value (11×0.5 – 10×0.5) = 5.5 -5 = BGN 0.5, ie. 50 stotinki.
However, after the first throw we will not have 50 cents. profit. It will be either BGN 11 or we will lose BGN 10.
In the picture below you can see a diagram showing the two possible results compared to the expected value. As you can see, both results are equally likely, a 50% chance for one and a 50% chance for the other, which in itself is a very risky investment.
However, when we make a second bet with BGN 10 on Ezi at 2.10 odds, we already have a total of 4 possible results.
To be a total of BGN 22 up is with a 25% probability, to be BGN 1 for profit is with a 50% probability and to be BGN 20 down is a 25% probability. The expected value is already BGN 1, because we have 2 throws of 50 cents expected value.
As shown, only one of the results leads to negative gains. In fact, the probability of losing money has been reduced to 25%, only half of what it was after the first attempt. On the other hand, the 25% chance of losing money is still outside our comfort zone.
The law of large numbers states that the average value of the results obtained from a large number of experiments will approach the expected value. This means that if we toss the coin many times, we should expect it to show Ezi and Tura approximately the same number of times.
So let’s see what happens if we continue to increase the sample size. Of course, as the number of possible outcomes increases, winning each bet will become very unlikely and similarly it will become very unlikely that you will lose all bets. If we draw the different results and their probability after 1000 bets, we get the following curve:
Now a few observations need to be made. First, we know that the expected value should be BGN 500 (BGN 0.5 * 1000 throws). This is reflected in the probability distribution, which is symmetrical about 500. This means that it is equally likely to be above and below BGN 500. In addition, the chances of a negative return are much lower than before.
In fact, we can calculate the probability of losing money after 1000 bets to be 7%.
The lesson is simple. While the size of your sample is small, placing valuable bets is only part of the story and the risk is still strong.
By increasing the size of your sample of bets with a positive expected value, you will reduce the risk of a negative return and your results will approach the expected value. This is the power of the law of large numbers.
How to reduce the dispersion / variance?
- Number of bets
As already mentioned, the more bets with value you place, the less variance you will have in the long run.
- Odds
The higher the odds, the bigger the deviation you will have. The reason is very simple. If you only bet on bets with odds of 11 and your advantage is 10%, you can expect your bet to be won once every 10 and win 11 times on your bet.
In theory, you can lose 9 times in a row and then win 1, which kills everyone and you win. That is, you have a bet of BGN 10 at odds of 11, which is a profit of BGN 110 with a total bet of BGN 100, ie. BGN 10 profit, which is the expected value.
- Time until the start of the match
The more time until the start of the match, the greater the chance to change the odds, because new news may appear on the market, which increases the potential deviation.
While the closer to the start time you place your bet, the less likely you are to have new news.
For example, if you have a 3% advantage 1 day before the match, but on the day of the match there is news that 2 starters of your team will not play, your advantage will be lost and the closing factor will not be in your favor. There is a chance for the opposite, of course.
- The Edge
It is good for your advantage to be as large as possible, ie the expected value.
In the best cases, try to have more time before the start of the match, the higher the advantage, at least 4-5%, while the closer you are, the less, because less movement is expected. of the coefficients.
- Lower your bet
The larger your bet in%, the greater the deviation of your entire bank.
As you know, Warren Buffett’s first rule is never lose money, and the second is Never forget rule number 1.
So the important aspect is to manage the risk so that one does not put oneself in a situation where the bank has shrunk to a point that makes recovery difficult, no matter how much you make a solid profit.
If we missed something, add it in the comments