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Human emotion is both the source of opportunity in trading and the greatest challenge. Master it and you will succeed. Ignore it at your own peril.
I recently read this quote while reading the book Way of the Turtle. It applies to sports betting just as much as it does to the stock market. When we really break it all the way down to the beginning, when a line is first set, all the way to the final bell and we see the winners and losers, our entire industry is based off of emotion.
Ever heard of a company named Las Vegas Sports Consultants? Not many people have, even in our industry. They set the lines for college football that 90% of sports books use. They have a complicated mathematical model they use to determine team strength and matchups, but that is only a starting off point. The casinos are their clients and the casinos need to make money. They guarantee a profit by seeing an equal amount of money wagered on both teams, and then they get to keep the juice as their profit with no risk. So how do they do this? They set a line that they believe will encourage an equal amount of action on both sides. That’s the trick. They don’t set it based off of “real” team strength, it’s based off of what, and how, the public will react. The emotion of the public plays a much bigger factor in the making of the line than most people realize. When the line moves it is to encourage action on one side because the other side was getting all the money put on it. It’s hard to bet against the team you grew up rooting for, but the disciplined man can do it every time. That’s what it takes to make the expert picks. They have actually devoted a field of psychological study to this phenomenon called behavioral finance.
As sports handicappers we take advantage of this. By having an accurate algorithm to determine team strengths we can see when human emotion has pushed the line out of whack one way or the other and take advantage. By controlling our emotions we are able to see opportunities. But this is only part of the emotional battle we face as investors.
To have a 57% winning percentage in our field is great. Over the long run we would make very good money. However, we must also keep in mind that 57% wins also means 43% losses. They won’t always be nicely spread out either. At times we may find ourselves taking a very bad string of losses and it can make even the most stoic of individuals upset and desperate. By following the perfect money management system, the Kelly formula, you still have a 1/3 chance of your bankroll being halved before it doubles. Many people can’t mentally handle their bankroll dropping to half its size. We have a long-term expected growth but there will be short-term volatility. This is the time that is crucial. Are you going to compound your errors and chase the money? Or are you going to stay disciplined and follow the system that has the proven track record. It’s very easy to stay positive and disciplined when things are going well, but things will not always go well.
At times like these it’s very easy to fall into one of the most common emotions:
- Hope: I sure hope this next game goes well.
- Fear: I can’t take another loss; I’m going to sit this one out.
- Despair: This system doesn’t work; I keep losing money.
Everyone takes losses, but it’s how we handle them that will determine who ultimately ends up on top. By never allowing ourselves to get too up or too down we maintain a nice emotional balance regardless of the most recent events. We never have fear of the next loss so we can always execute the system perfectly. Here is a true, but somewhat disheartening fact. At any given time during your wagering career, even following the principles of money management and with winning picks, your bankroll will be less than it was at its highest point, 92.6% of the time. So if you look at the size of your current bankroll and compare it to when it was at its largest you will be disappointed 92.6% of the time. This just goes to show that even on an upward sloping graph; you still take small steps down.
Wager with an edge, manage risk, be consistent, and keep it simple. By maintain these four principles at all times we are able to succeed where others have failed. Sports handicapping is an opportunity for all of us.