Rufus, Hedging, and Oxford Coma

This blog doesn't get too many comments, so it was rather remiss of me not to mention one from Jason regarding my Risk Is Personal post a few days ago.

Jason wrote:

Hi Cassini, This (very loosely) reminded me of a podcast I listened to recently, on the subject of hedging. Not sure if you're a listener to the Bet The Process podcast, but within the last couple of months (Season 5 Episode 32) there was a discussion on whether to hedge out of a bet even if the hedge itself is a bad value bet. At around 25 minutes in the discussion covers the use of Kelly in relation to hedging out of a bet, even at a negative edge, when considering what you stand to win in relation to your bankroll/personal wealth. I can't really comment on the maths (although I'm sure you can), but thought it might be of interest when considering the follow-up poll referenced in your piece (where the responders are asked to consider the effect of net worth on their choice between red and green). Hope this is of some interest to you. All the best, Jason

I found the podcast in question, and it's well worth a listen. Tying a couple of former posts together, and I mentioned here that my 100 miles every month goal was in jeopardy. 

Additionally, and while less of a factor than calories ingested, my exercise routine has also been significantly disrupted and my monthly goal of 100 miles on foot is in serious danger of being missed for the first time since November's feeble 93 miles.

Fortunately listening to podcasts is a great way to pass the time and learn something new, and I ended up at 115.9 miles with one of those hours spent listening to Rufus and Jeff discussing hedging and Kelly as Jason describes.

Rufus Peabody is a betting person I respect a lot, and I've mentioned him several times in this blog, including recommending a podcast he did for Pinnacle Sports a little over three years ago. He also led me to the excellent book The Logic of Sports Betting by Ed Miller and Matthew Davidow which you should definitely read if you are serious about being profitable in sports betting. 

Back to hedging out of a bet, even at negative value, the premise was this. You make a bet at fairly long odds, and are lucky enough to find yourself in a very good position. 

I thought I'd written about this before using the example of backing a small team to win the FA Cup pre-season (say Oxford United), going into a coma, before awakening on the eve of the Cup Final to find that they are playing Crystal Palace. (One can dream). 

The £100 bet was placed at 1000-1, and Oxford are now available at 2.75 to lift the Cup. Palace are just 1.35 to win their first proper major trophy, but their fair odds are really more like 1.5.

The question is should you let your bet run or hedge out by backing Palace, even if that latter option is poor value? 

The answer is "it depends". 

If you are Warren Buffett (who just turned 92 by the way), £100,000 is nothing, and you should let the bet ride rather than take bad value, but what if you are someone to whom that sum would be rather significant, and you were a lot younger than 92? 

This is a situation (an extreme one admittedly) where you would almost certainly lock in at least some profit whatever the outcome. Yes, you'd be giving away value, but in the same way that your insurance premium isn't an accurate reflection of the true risk, sometimes insurance helps you sleep. Though if you've been in a coma for nine months, you're probably done with sleep for a while! 

Rufus describes the real world example discussed on the podcast here, and this is also well worth spending some time on. His conclusion is this:

Psychological Considerations of Hedge Betting

Hedge betting is very difficult for some people, because of regret. If you don’t hedge a potential big payday, and the bet ends up losing, you kick yourself for not hedging. If you hedge and the original bet won, you kick yourself for hedging.

Have a process for making these decisions. I have no regret for not hedging my Mito Pereira outrights, because I knew hedging was not the optimal decision. Were my bankroll smaller, I 100% would have tried to hedge (and definitely not regretted it), because it would have been the optimal decision. “Professionals don’t hedge so I shouldn’t” is a huge load of bull. Every situation is different. You can’t paint this decision in broad strokes.

It’s about having a process that you stick to. Whether to hedge isn’t a decision you have to make – the decision has already been made for you. You know what the optimal decision is. You just need to not f*** it up. Whether or not it works out in one instance is immaterial. Your process was good, and in the long run you are putting yourself in the best position to succeed.

Thanks for the comment Jason, and I'll probably listen to a few more episodes of Bet The Process as I try to get back on track to average 5 miles a day for the year. I'm currently at 4.917 should you be wondering.