Variance is a nightmare. Variance is one of the bigger topics relating to betting and doing this for a living. We will try and limit it to a few tweets. Variance is simply how your results are performing relative to the Expected Value (EV) of the bets you place.
You can either run as expected, above expectations or below expectations. If someone is running well they would be achieving results better than expected and if running poorly their results worse than expected. Over time you would expect results to converge towards the EV.
The longer you have been in this game and the more bets you have placed ,the greater the range of outcomes you will have seen (good and bad). That is assuming the bets you are placing, actually have the EV you think they do. Lets demonstrate it with some quick maths.
Lets stick to the old fav of tossing a coin. If we tossed a coin 1000 times it is expected that the longest losing streak would be 10. With 10000 tosses that goes upto 14. That doesn’t mean it cant be longer or shorter. That is just the expected longest losing streak for that number of tosses.
The law of large numbers suggests that as the sample size increases the variance will reduce and will converge towards that EV. So in essence as the sample size grows the variance reduces although you might see larger swings along the way.
Let’s be clear variance (often where luck plays a huge factor) is a complete bitch. You can be placing great bets but because of variance they will lose. Vice versa, you could be placing poor value bets that keep winning in the short term. Over time both will theoretically level out.
One of the hardest parts of this game is withstanding the grotesque swings that variance can throw at you. Just think back to the previous example of 10k tosses. Imagine going on a run of 14 even money shots losing. That’s expected to happen. Not abnormal. What can get very tricky is removing the noise and actually trying to establish whether you are in fact running poorly because of variance or whether the edge isn’t what you expected. Likewise, whether you have an edge or you have just been lucky.
One of the ways to reduce variance is by hedging positions and that continues a lot of recent debate with Rufus Peabody and Dan Abrams. I do just want to give a shout out to Dan who has written some very interesting stuff on variance and the maths behind it.
A different way to reduce variance is by taking shorter prices. i.e. the variance is much lower on a 2 (evens) shot than it is a 5 (4/1) shot. If we go back to the 1k tosses you would expect a streak of 31 losing bets at 5. On 10k tosses that streak goes up to 41 losing bets in a row.
Compare those runs to the even money tosses of 10 and 14. I have always been involved with golf betting where you have much bigger prices and hence the variance can be pretty crazy. When allied to relatively few events a year it presents a huge problem.
Let’s assume there are 80 golf events a year to bet on. You can see that is a tiny sample size and just how big a factor variance can be. Its also why I am very sceptical of golf tipsters as a general rule. Many of them may well just be running well over a very small number of bets.
Oh but he has shown a profit three straight years. That may have been less than 250 events that have been bet on. In Talebs book ‘Fooled By Randomness’ he even alludes to the idea that some people will just be very lucky over a sustained period of time.
It’s because it is just a numbers game. Someone will keep making excess returns through luck rather than skill. The same applies to traders in the City. The converse happens as well and it is likely someone will go broke or have stopped before realising they were just incredibly unlucky.
Variance will see many ideas persisted with long after they should have been and lots of potentially successful ideas stopped prematurely. Its why it is incredibly important to understand what edge you have on any market.
I would always say the following for variance and you need to prepare accordingly in terms of bankroll. Imagine the worst you have ever run or think you could run. Triple it and the associated pain and you might just begin to scratch the surface on how bad variance can be.
To survive the vagaries of variance you need incredible discipline, huge patience, solid staking plan and most importantly an edge. You almost have to embrace variance and just accept it will happen. Knowing that you will hopefully emerge the other side relatively unscathed.
I think variance is the single hardest factor to deal with as a professional punter. It has broken many very successful punters over the years. It is crucial to ascertain whether you have an edge/still have an edge in the markets you are playing in.
ProPunting 