A Gambler Who Cracked the Horse-Racing Code
Ex-professional gambler checking in.<p>It's no secret that it's possible to figure out which horse is going to win a race with reasonable statistical confidence.<p>The trick - and always has been - is making sure you can make a profit from it.<p>If a horse has a 30% chance of winning a race, and you're being offered odds as if it only has a 10% chance (i.e. 9/1), you have identified "value" or what Kelly Criterion would describe as "edge". You can mathematically in the long term make a profit, and Kelly can even tell you what %age of your bank to wager to optimise your expected returns: <a href="https://en.wikipedia.org/wiki/Kelly_criterion" rel="nofollow">https://en.wikipedia.org/wiki/Kelly_criterion</a><p>Identifying the "true" odds of an outcome and then identifying what odds you're prepared to take (adding an over-round), is a key piece to what bookmakers do when creating what they call "the tissue" - the opening odds they offer that is then adjusted to manage liabilities in line with incoming weight of money (WoM) from bettors.<p>Kelly was a colleague of Claude Shannon. His papers have stood up to the rigour of mathematical analysis and also make intuitive sense to those who spend enough time thinking about it.<p>It has successfully been applied in casinos (Blackjack system pioneer Edward Thorpe is/was a fan), bookmakers, hedge funds (Thorpe again, but many other funds apply Kelly too), and everything in between.<p>But here's the rub: you won't get to keep your edge for very long. Bookmakers, betting exchanges and parimutuel systems all adapt to deal with long-term winners. Your window of opportunity is limited. Already bookmakers have good systems for identifying true odds for English Premier League games and make a tidy sum on over-rounds (profit margins) as thin as 3% because they can eliminate value.<p>That said, as any fan of Sabremetrics will tell you, statistical analysis of a sport you love can be very rewarding and I would not put anybody off this if they already love the horses (as I still do).<p>Just tread carefully, and to make a long-term killing you're going to have to treat your setup like a hedge fund and always be moving around finding new edges.<p>I'm @p7r on Twitter if anybody wants to talk about this - I could talk for hours and hours and hours... :-)