Money Management Techniques

Ask bettors why they lose and/or what keeps them from making more money gambling and, chances are, most will point to a lack of money management acumen — “my betting sucks” being a popular, if not exactly eloquent, refrain.

“The number one reason most sports gamblers lose isn’t because of poor picks, but instead is because of poor money management,” states Allen Moody, a sports gambling expert. “There are far more bettors who can pick winners than there are who can make money, and money management is the key.”

Well, yes and no.

Frankly, it doesn’t matter how you play if you don’t have an edge. Sure, there are all kinds of strategies — the Martingale system instantly comes to mind — that purport to turn losers into winners, but in reality, they work about as well as asking the prom queen for a date in Klingon.

Still, optimizing one’s bets and growing one’s bankroll is chu’ potlh (according to the Bing Translator, that’s Klingon for “clearly important”). And the most popular method for doing this is the Kelly Criterion.

Devised by John L. Kelly, a physicist and computer scientist at AT&T’s Bell Labs, the Kelly Criterion provides a simple way to aggressively increase one’s capital, while minimizing — as much as possible — risk.

Kelly Criterion
Winning Percentage – Losing Percentage ÷ Avg. Winning Odds

But does it really work?

One can’t help but notice that even the most ardent Kelly supporters aren’t strictly faithful to the formula.

For example, Edward O. Thorp, the man largely responsible for popularizing Kelly’s work in his book “Beat the Dealer” and, later, via his hedge fund activities, advocated betting only a fraction of one’s Kelly advantage.

“If you bet half the Kelly amount, you get about three-quarters of the return with half the volatility,” notes Thorp in Jack Schwager’s tome “Hedge Fund Market Wizards”.

“So it is much more comfortable to trade. I believe that betting half Kelly is psychologically much better.”

Enter James Selvidge, who came up with what many believe is a great alternative to Kelly’s volatile theorem.

Selvidge is the author of “Hold Your Horses” and he also taught a class in Advanced Thoroughbred Handicapping at the University of Washington (talk about your dream jobs). More importantly, he is the creator of a unique betting strategy called the base bet plus square root, or BB+SR, method.

Using this money management technique, a bettor determines a base bet — the hard part (using Kelly as a guide certainly makes sense) — and then adds the square roots of his/her profits (if any) to each subsequent wager.

Hence, if a sports bettor is generally staking $100 per game and he’s up $1,000 for the year, his next bet will be $131 ($100 +   $131).

According to fellow horse racing author James Quinn, one of the big advantages of the BB+SR method is that it “offers the best return on money invested by the small bettor. That is, the risk factor associated with the method is as low as can be found anywhere.

“A second advantage is that the method … gets good results at minimal risk over a season’s time, a month’s time, a week’s time or even one day’s play,” continued Quinn.

Based on my own series of tests, it might also grow one’s bankroll more efficiently than Kelly.

In 10 separate 500-event betting simulations featuring an average win rate of 55 percent and a Kelly edge of 5.5 percent, the BB+SR method outperformed the Kelly Criterion all 10 times and grew an initial $500 bankroll an average of 125.2 percent, compared to 77.8 percent for Kelly.

Figure 1: Kelly Criterion Bankroll Growth

Figure 1: Kelly Criterion Bankroll Growth

Figure 2: Base Bet Plus Square Root (BB+SR) Bankroll Growth

Figure 2: Base Bet Plus Square Root (BB+SR) Bankroll Growth

Now, a couple of warnings are in order:

1) The testing I did used the Kelly advantage — in this case, 5.5 percent — to determine the base bet of $27 (5.5 percent of the $500 starting bankroll). Therefore, this $27 was also the minimum bet, which means that had we experienced 18 consecutive losses to begin our gambling venture — unlikely, but certainly possible — we’d have $14 left in our coffers by the 19th bet.

Contrast that to Kelly, which would require a losing streak of 63 games to reach a similar point of destitution.

2) Related to the above, it seems logical to conclude that the BB+SR method is best suited to higher hit-rate events like sports betting OR that gamblers should utilize a much, much lower base bet — half of Kelly, a quarter of Kelly, etc. — when wagering on lower probability affairs like horse racing.

Bottom Line: The BB+SR method provides a relatively safe and effective way to swell one’s bankroll, especially for casual players — but know your stats. Long losing streaks can be very troublesome for those utilizing the BB+SR approach.

Derek Simon
Derek Simon is the Senior Editor and Handicapper at US Racing.
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