Managing risk
It goes without saying that betting carries a high level of risk to capital. Risk management is possibly the most important, yet most widely underestimated, aspect of betting. If you don't consider and understand the risks, at best you will probably lose money.
In an earlier section we talked about betting as a form of investing and touched on the discipline of risk management and its importance in the investment world. In fact the same holds true in any business and if we're going to be successful at betting, we need to think of it as our business.
In business the risks are diverse: competitor encroachment, regulatory change, staff (fraud, human error, absence, etc.) to name a few. In investment the risks tend to be based on economic factors such as inflation, interest rates and oil price; political factors and global catastrophes. In betting, fortunately, we have less to worry about - primarily the risk of losing money, although at a lower level we have event specific risks like injuries and the weather.
By managing risk in betting, as in any business, we don't mean eliminating it, rather that we understand where our risks lie and take steps to mitigate them, thus increasing our chances of success and reducing the likelihood of financial loss.
Causes of loss
In no particular order these are some of the factors that can lead to significant long term losses, or in some cases short term losses:
- Lack of diversification - over-commitment to a single event
- Bets are too big - you're betting more than you can afford to keep it going
- Poor budgetting
- Ill considered bets - a poor system (or no system), you're not identifying value
- Loss chasing - the 'doubling-up' mentality
- Over confidence - you think you're good (it may actually be luck)
- Bad luck
- Addiction
No doubt there are others but we'll expand on each of these, setting out some ideas on how you can mitigate them.
Diversification
We opened this section with the statement that betting carries a high level of risk to capital. This isn't strictly true if we know what we're getting into and we diversify in the same way as an investment manager would diversify a portfolio os stocks and shares.
As with any investing, a big bet is a big risk. A series of smaller, well-informed bets is better than a small number of larger bets. However good your system is at identifying value, there will always be unexpected results and quite often the results won't come in a nice steady stream.
To help illustrate the benefits of diversification, let's say we've set aside an amount of money that we can afford to commit to betting this week. Our value model has identified ten football matches as follows, ordered by value:
| Match | Probability | Implied odds | Available odds | Value index |
|---|---|---|---|---|
| A | 50% |
2 | 2.16 | 108.0 |
| B | 50% | 2 | 2.15 | 107.5 |
| C | 50% | 2 | 2.14 | 107.0 |
| D | 50% | 2 | 2.13 | 106.5 |
| E | 50% | 2 | 2.12 | 106.0 |
| F | 50% | 2 | 2.11 | 105.5 |
| G | 50% | 2 | 2.10 | 105.0 |
| H | 50% | 2 | 2.09 | 104.5 |
| I | 50% | 2 | 2.08 | 104.0 |
| J | 50% | 2 | 2.07 | 103.5 |
For this illustration, all matches have a 50% probability of winning but the principles will apply whatever the odds. Well look at four scenarios:
- We bet on the best value match only - match A
- We bet on 3 best value matches - matches A to C
- We bet on 6 best value matches - matches A to F
- We bet on all 10 matches
Using what is known as a Monte Carlo simulation with a value based staking plan (more on these later), we've worked out some expected returns and the risks of losing various proportions of our money.
Measure |
Best match | 3 best matches | 6 best matches | All 10 matches |
|---|---|---|---|---|
Average profit |
7.7 % | 7.6 % | 7.0% | 6.1% |
Chance of no profit |
50.0 % | 50.0 % | 40.5 % | 43.2 % |
Chance of losing 10% |
50.0 % | 50.0 % | 34.2 % | 32.6 % |
Chance of losing 25% |
50.0 % | 37.5 % | 28.0 % | 18.8 % |
Chance of losing 50% |
50.0 % | 12.4 % | 10.9 % | 5.3 % |
Chance of losing 75% |
50.0 % | 12.4 % | 1.5 % | 0.8 % |
Chance of losing 100% |
50.0 % | 12.4 % | 1.5 % | 0.1 % |
Monte Carlo simulation, 100000 cycles. The fixed amount of money available is spread across the selected bets in proportion to value (i.e. a match with value index of 108 would get double the stake of a match with value index 104, assuming the same win probability).
From this table you can see that diversification is a very reliable way to reduce the risk of losing money, without having to make a big compromises on your expected returns. You might conclude that there is an optimum balance between risk and reward at around the 6 match mark or you may prefer to settle for a lower return for an even greater reduction in risk. Perhaps you will cut off at the point where value falls below a certain level - perhaps below 105 on the index, which would give you 7 matches in this example. These are all things you might want to test and refine if you develop a system. In our section 'betting systems' we look at value, risk and diversification in much greater detail, including a case study.
Bet size
You'll need to decide how much you can afford to bet, either by earmarking an amount as a bank to draw from and grow, or by setting aside an amount you can afford to lose each week. Once you know how much you have available you can decide on your 'standard' bet sizes so that you will never be in a position where you are 'overspending' and, during difficult patches, depleting you entire pot.
Generally speaking it makes sense that the size of a bet reflects the amount of value you find in that bet and the probability of the bet losing. So you might set your standard bet size at £10 for 50% probability and a value index of 105 and adjust this up or down with probability and value.
The next section looks at staking plans in a lot more detail. The point we're making here is that if you choose the right one for your particular system and style of betting, you should be able to further reduce the risk of losing all your money.
Your system
If your system for identifying value bets is not working, you will probably lose money over time. This is a big risk even if you're confident that you have been rigourous in the back-testing of past results. The problem is that sports change in subtle ways and there are no guarantees that past trends will continue. Take football over the years of the Premiership - the increase in foreign players, Abromovich buying Chelsea, the pass back rule, referees clamping down on one thing or another - lots of small changes that very slightly influence the way the game is played and, therefore, the way results pan out.
So, even with our best efforts, our systems can let us down. The trick is in identifying when this has happened so we can minimise the impact on our finances and to refine our models. The difficulty is knowing when we are losing money because our system has failed us and when it is due to bad luck and freak results. Fortunately, with the help of detailed betting records and careful analysis we can usually find the cause, but not always before we have lost significant sums.
Our advice with new betting systems is to not only back test, but forward test for a period of time (pehaps a season in football) before committing full sized bets. And the same is true if you are following someone else's system or tips.
Loss chasing and over-confidence
These two points go hand in hand. They are easy traps, they apply to all forms of gambling, and they are ultimately damaging to your financial well being. Discipline is the key to successful betting and there is no place for the emotions of greed and fear - greed for more and bigger wins, fear that you are losing money and won't make it back.
Betting is a discipline that requires you to have a plan - a system - that is well prepared and that you follow consitently. Remember that wins are like buses. They don't come along one every ten minutes - you can go a long time without one before three turn up at once.
If you're on a losing run you need to stick with the plan and resist the temptation to chase your losses by 'double up' or placing silly bets where little or no value exists. This doesn't literally mean doubling your bet size each time, but it does mean increasing your bet size to some degree, in the belief that you must be overdue a win and that the increased stakes will more than make up for the previous losses. Even if you really are finding value and its just a run of bad luck, this approach can cause you to come unstuck big time and lose your whole betting bank very quickly. Of course it can and often does work, but remember we're talking here about risk. Doubling up is not an approach we would recommend for managing the risk of capital loss.
A similar mentality can take over when all your bets seem to be coming in - one after another. It happens and even the best of us can start to believe we have become an infallible betting genius. The temptation here is driven by greed: we're making money and we want more of it! The result is that we increase bet size and with it the risk of losing more money than we had originally bargained for. Remember the bus analogy and you shouldn't go too far wrong.
If you are finding yourself loss chasing when losing and upping the stakes when you have some good results, be warned and continue to read the rest of this page.
Bad luck
"The ref shouldn't have given the penalty". It might be true and, yes, we all suffer bad luck in betting regularly. But bad luck alone will not be the cause of you losing money over an extended period of time - luck will even itself out over the course of a football season. Bad systems and bad discipline are, however, valid excuses for losing money from betting.
Is it compulsive, are you addicted?
Let's keep this simple. If you're losing money on a regular basis and you think you are suffering from some of the causes we have highlighted above (especially 'bets are too big', 'loss chasing' and 'over-confidence') then you may have, or be developing, in to a compulsive gambler. This is an addiction.
Like any addiction, if you refuse to acknowledge there is a problem and it goes on unchecked, it will probably end in tears, or worse. But we're not here to provide councelling and fortunately there are other websites that make a lot of sense of this growing problem. If you suspect you are getting into difficulties please check out the links below, if you're not sure then follow what we have to say regarding record keeping in the next section - you may not even realise you are losing.
External link: http://www.gamcare.org.uk/
External link: http://www.gamblersanonymous.org.uk/
| Previous - Analysis & Prediction | Next - Staking plans |