A Gambler Who Cracked the Horse-Racing Code
Ex-professional gambler checking in.It's no secret that it's possible to figure out which horse is going to win a race with reasonable statistical confidence.The trick - and always has been - is making sure you can make a profit from it.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: https://en.wikipedia.org/wiki/Kelly_criterionIdentifying 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.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.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.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.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).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.I'm @p7r on Twitter if anybody wants to talk about this - I could talk for hours and hours and hours... :-)