Re: Hedging (852 Views)
Posted by:
TempletonPeck (IP Logged)
Date: August 10, 2016 02:02PM
BitPlayer Wrote:
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> Ignoring the psychological side, doesn't there
> have to be a mathematical approach to deciding
> whether and how much to hedge?
I would say that if you ignore the psychological side, the mathematically correct amount to hedge would always be $0. A hedge, by definition, is a position you take opposite your initial/current position to increase minimum return in exchange for decreasing overall return.
A hedge always costs you EV, so in that sense is always mathematically 'wrong.' I suppose a scenario could exist where an uncovered horse was so overlaid that a bet on him could act as a hedge which increased your EV, but it's a bit of a unicorn.
> By not hedging,
> you are basically taking your implied winnings
> from the first X legs and splitting them equally
> among win bets on your covered horses in the last
> leg. Perhaps the Kelly criterion would tell you
> whether you have bet too much on those horses, in
> which case you should take some money off the
> table by hedging? That's where the strength of
> your opinion on the last race and the size of your
> potential score come into play.
You can definitely calculate the correct-for-you amount to hedge, using Kelly/Risk of Ruin. You can even just do a back-of-the-envelope "I'm going to be sick if I don't walk out of this with at least X," and dutch accordingly.
IMO a person's approach to this should vary dramatically depending on whether they're a pro, a once-a-year player, a serious amateur gambler, hate or love the swings, etc.
Personally, I enjoy the sweat, and I don't mind the swings, so as a general rule I don't hedge.