Re: Hedging (840 Views)
Posted by:
Mathcapper (IP Logged)
Date: August 10, 2016 02:56PM
Agree with TempletonPeck - if you’re a good handicapper, then from a purely mathematical perspective you shouldn’t be hedging your bets at all, because the long run ROI on your uncovered horses should be negative (ie. tote odds are less then the fair odds you’ve assigned, so Kelly Criterion says not to make those bets).
However, given the fact that most horseplayers have limited bankrolls, and given the low probability of hitting superexotic bets, long run ROI is not the only consideration. Risk of ruin, cash flow and the size of the potential score, as you say, are also important factors.
Let’s take the example I posted (6 horse field in the last leg, 3 covered, 3 uncovered) and look at it purely from a mathematical point of view.
Let’s say the 3 horses you have covered are all 9/5 and the 3 uncovered horses are all 20-1, you’ve put $1K into the Pick 6 and you know the thing is going to pay $40K to each of your covered horses.
Adjusting for takeout, the win probabilities are 29.4% for each 9/5 horse and 3.9% for each 20-1 horse.
Your EV = (.294+.294+.294)x($40K-$1K) + (.039+.039+.039)x(-$1K) = +$34.3K
Now let’s say you make $1K win bets on each of the 3 uncovered horses.
Now your EV = (.294+.294+.294)x($40K-$4K) + (.039+.039+.039)x($21K-$4K) = +$29.8K
By making these saver bets, you’ve reduced your expected value somewhat, but your outcomes are now much smoother and less binary:
Without hedging, you have an 88.2% chance of [u]winning $39K[/u] and an 11.8% chance of [u]losing $1K[/u].
With hedging, you have an 88.2% chance of [u]winning $36K[/u] and an 11.8% chance of [u]winning $17K[/u].
Given the low probability of hitting a Pick 6, you could easily find yourself going long stretches where you go through tens of thousands of dollars hitting nothing more than a token Pick 6. If your bankroll can withstand the roller coaster ride you are certain to experience when playing these low probability superexotics, then in an absolute monklike sense you will likely generate a higher long-term ROI in the long, long run by not hedging.
But in terms of risk of ruin, mental stability and cash flow, when you do happen to find yourself in situations like the one above where you can put yourself in a position to guarantee yourself a big score ( $17K profit) rather than risk ending up actually [i]losing[/i] money, it makes sense to put on those hedges.
Thought of another way, would you make a $17K bet that the 3 horses you didn’t like in the last leg [i]aren’t[/i] going to win? Because that’s essentially what you’re doing when you find yourself in that position and you [i]don’t[/i] hedge.