Sharpe Minds

Mike sent me an email asking:

First of all, just a quick thanks for the blog – it’s always an interesting read.

I don’t know if you have written about this subject previously but do you ever use (or have you investigated using) financial type analysis to betting systems that you use? I am thinking of things like measuring volatility, drawdowns or Sharpe ratios etc?

Thanks for the kind words. Last month actually saw the daily hit count average over 1,000 for the first time ever.

I have written about the Sharpe Ratio before, and Sports Picks System published this piece on it as it applied to my NFL Small Road 'Dogs system, (which line was the optimal bet?) but in general I think its relevance to sports betting is extremely limited, at least for most of us. 

The Sharpe Ratio is used in the financial industry where most markets are quite different from betting markets, the exception being the options markets which like most betting markets, are only active for a relatively short period of time.

But as Investopedia explains:

The Sharpe ratio also tends to fail when analyzing portfolios with significant non-linear risks, such as options or warrants.

Along with the Kelly Criterion, I find this kind of thing interesting in theory, but of no practical use. Use 2% for your stakes and save yourself a whole lot of time for little benefit.

The primary concern for sports bettors is in identifying an edge, and riding that edge until it inevitably vanishes. 

The Sharpe Ratio might tell you that , for example, your NFL system is 'better' than your MLB system, but if both are profitable, you'll play both regardless. 

Also a factor is that most sporting systems are seasonal and not year round, so systems often don't overlap, which is a contrast to the year round financial markets where comparisons are more meaningful.

Also worth mentioning is that no system will remain profitable indefinitely. If there's an inefficiency in the markets, it will be identified, and disappear, soon enough. 

Evaluating the Sharpe Ratio or measuring volatility is mildly interesting, but for most of us, it’s not a useful exercise.

For more on the Sharpe Ratio, I'd recommend this post here from Betfair Pro Trader and the book Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown.