Thursday, August 31, 2017

Horse-Racing Overlays

Sports traders sometimes conflate AvB events with AvK (K = N-1) events (N = number of entrants). The prototypical AvB game is a football match and the equivalent AvK example is horse-racing. Some experts encourage traders to identify a single overlay in both events and bet accordingly. Whereas this advice is correct for AvB events, it is not correct for AvK events.
In horse-racing, you should only select those races with at least one overlay for further examination. But, as Ravi Phatarfod points out in his excellent 1996 paper Betting Strategies In Horse Races, a gambler is more likely to correctly assess that the winner will be one of three horses than being able to correctly assign win probabilities to each individual horse. And, as John Haigh illustrates in Taking Chances, Kelly betting on horse races also encourages us to spread our risk across multiple entrants including, on occasion, those from all three categories of bets, favorable (positive expected value), fair (zero expected value), and unfavorable (negative expected value) bets. This approach guarantees over time that you will minimize your risk of ruin (total loss of capital).

Note: You must enter horse details in descending win probability order only.