Wagercapping and Value

[Houndog]

Following is a post from another BBS that I thought to be thought provoking. I think these ideas would apply to RDSS and users of other Sartin programs as well. The post follows and the original article is bolded.


Following the compelling conversation on the overlay/underlay thread, I've been a big believer for a long time in the lack of understanding in the construct known as "value" and how misguided it is in popular handicapping parlance. Watching TVG one day, where the word value was uttered no less than 46 times in an hour, in what I felt was a horribly misplaced context, I decided to pen a piece discussing the pitfalls of value.

I appreciate the thoughtful handicapping and ideas of this forum and would like to share this article I wrote for Horseplayer Magazine in the JAN/FEB 2010 edition entitled "The Perception of Value". I expect plenty of disagreement here as I am not a believer in the creation and use of a value line in daily handicapping. I also am not a follower of the spot play methodology as it does not suit my personality or handicapping strengths. I have a HUGE amount of respect for those patient enough to chase positive ROI with the spot play methodology. I

In any event, despite certain differences in individual methodologies here on this forum, one thing is for certain: This group is the most thoughtful and inciteful collection of 'capping minds in cyberspace. We are all here to become better handicappers and engage it what we love and I have great admiration for the respect that is shown to others, those of all levels, herein. After all, anyone willing to think outside of the box of simple static PPs is light years ahead of the pack. Even those with a lower current level of aptitude are willing to ask questions and will be better in the long run for it, especially given the thoughtful responses.

Thanks in advance for reading and I would appreciate any and all comments.

All the best in 2011...


“The Perception of Value”
A Contrarian’s Approach to the Ever-Elusive Concept of Determining Value, and How It’s Not as Important as You Might Think

Part I: “An Alternate Theory”
George Soros is one of the most successful investors in the history of financial markets. As of May 2008, he was ranked by Forbes as the 97th richest person in the world. People as successful as Mr. Soros possess special qualities that enable them to excel in a world where so many fail. George Soros is a brilliant man. However, intellect alone isn’t responsible for his wealth. There are millions of exceptional individuals in the world that fail to capitalize on their god-given talents.

Those rare individuals reaching the apex of success have something new to offer to the common discourse. The traditional way of thinking breeds mediocrity. To truly reach a different level, throw out widely held principles and look for an alternate angle. For George Soros, a contrarian viewpoint in the form of his theory of reflexivity is precisely what enables him to gain a considerable edge on his competition.

In simple terms, reflexivity revolves around the fallibility of human beings attempting to understand the world in which they are a part. For example, Soros uses reflexivity as a counter to the widely accepted economic theory of supply and demand that dictates that markets are said to straighten themselves out at a point of equilibrium. His argument is that our own bias and fervor lead to unavoidable mistakes, the most intense of which can produce results such as the mortgage crisis.

Here is an apt quote summarizing one of the main ideas of reflexivity: “It contends that social events are fundamentally different from natural phenomena; they have thinking participants whose biased views and misconceptions introduce an element of uncertainty into the course of events”

Mr. Soros utilizes the aforementioned fundamental elements of his theory to explain his approach to investing, politics, and other social events involving human subjects. While the finer points of reflexivity are a counter to accepted economic principals of financial markets, it can easily be applied to any other facet of life involving human decision.

I believe success can take a path that strays from the norm and, perhaps more importantly, is predicated on a mindset that is often counter to the majority opinion. The great thinkers and achievers often create a new approach that moves beyond commonly accepted wisdom. The importance of a contrarian state of mind is an essential building block to long-term success as a horseplayer. You will be a profitable handicapper only at a point in which you can gauge when, and to what degree, the majority is flawed.

Part II: “Reflexivity and Pari-Mutuel Value”
The pari-mutuel foundation of the North American sport of thoroughbred racing is rooted in the mold of a typical free-market system. Patrons, whether on track, via simulcast, or through online sources, collectively set the market price for the win, place, and show payoffs, as well as all exotic wagers. The theory of reflexivity is useful in the exploration of the pari-mutuel system—especially with respect to the concept of value—and acts like any other financial market. Of course, counter to the markets, when patrons are bullish on a horse, the price drops due to the increase in the amount wagered. The inverse is true if patrons are bearish on certain animals.

Value is a favorite subject of handicapping texts. This is a subjective, often convoluted discipline that forms the backbone of handicapping theory for just about every serious horseplayer. Due to the enormous challenges of profitably handicapping the horses, an understanding of value is considered the cornerstone of beating the usurious takeout. The key facet of this tenet is to find overlays—industry parlance for horses taking less money at the windows than what the player perceives as fair odds. This core concept is entirely subjective, but nonetheless widespread and worth ample discussion.

Several top horseplayers, the most experienced and shrewd in the country, have a much better grasp on the concept of value than their competitors. That is, they are able to exploit certain market prices set by the actors in the pari-mutuel pools when they feel it is to their advantage. They make wagers only if they perceive an edge, which is measured as the difference between the actual odds and their opinion of what the odds “should be.” For example, when a horse they believe “should be” 3/1 is headed to the gate at 10/1, this spread is considered quite advantageous.

While I agree the concept of value is important, the subjective nature of it is troubling and difficult to truly assess in a meaningful way. Further, some well-respected industry handicappers claim they have an advantage when a horse goes off at even money when their opinion is that the horse “should be” 4/5. Much of this mindset is rooted in the value-line concept by which handicappers create an odds line based on their idea of the probability of each horse to win the race.

Reflexivity would contend that bias is inherent in any attempt to explain behavior, such as wagering patterns by the subjects themselves, which are, of course, the other bettors. Therefore, the pari-mutuel free market is flawed through the difference in the reality of what the odds of the #1 horse to win actually are (perhaps 2/1) and the perception of what an individual feels the price for the #1 horse “should be” (let’s say 7/2) through their own interpretation. That is, the biases in our own perception of what constitutes fair value skews the system enough to ensure there is no such presumption as the proper price for each horse.

I understand why value is an important concept, but I fundamentally disagree with how it is conceptualized. If you spend a day watching TVG or flip through the simulcast signals at your local OTB listening to pre-race analysis, you’ll hear the experts talk about value every five minutes. Popular phrases like, “If you’re looking for some value in this race, here is your horse” or, “There are a lot of value opportunities in this full field.” These statements are as common as the day is long.

I have a pretty strong theory of how to win at the races that has very little to do with value as it is commonly purveyed. I don’t care where the horse “should be” priced because I never bet on low-priced animals. As such, I analyze all appropriate angles, past performances, race replays, and utilize all other handicapping tools to determine the most logical winner. If that horse is less than double-digit odds, I will rarely, if ever, play that horse to win or use it as a key to vertical and horizontal wagers.

The perception of value—seeking overlays—is largely irrelevant, as only one finite result will occur. That is, the horse an individual is backing with the alleged inflated odds still needs to win the race to be deemed an overlay under this line of thinking. For example, let’s take a situation where a handicapper extols the virtues of a horse that “should be” 5/1 and ends up 15/1 at post time. The horse puts in a nice run at the top of the stretch before fading to a sixth-place finish. The idea that the horse “should have” been 5/1 is completely irrelevant.

Proponents of the value line mindset might argue that if this horse had won, and its fair odds “should have” been 5/1, you’ve made three times your money, which in effect, negates the takeout. This is a strong fundamental counterpoint, but the 10/1 overlay is an individual observation, not fact or knowledge. Perhaps another handicapper thought the horse “should be” 15/1.
George Soros gives another telling example of his theory in action which helps to clarify the example discussed above: “Take the stock market, for example. People buy and sell stocks in anticipation of future stock prices, but those prices are contingent on the investors’ expectations. The expectations cannot qualify as knowledge. In the absence of knowledge, participants must introduce an element of judgment or bias into their decision making. As a result, outcomes are liable to diverge from expectation”.

That proclamation can easily be applied to the pari-mutuel system. That is, people have expectations for certain race results, which are not facts or knowledge. The decision to wager on a potential outcome is rooted in biased judgment, even if that opinion is through a meticulous review of past performances, race replays, and other handicapping tools. Therefore, the actual results of the race will often differ from the punter’s projected outcome. This naturally includes unforeseen barriers such as bad trips, unanticipated pace scenarios, injury, and other physical by-products of the chaos of an event as capricious as a horse race.

The importance of discussing this theory is threefold:
1) To reinforce the notion that the collective group is often wrong.
2) Promote a counter viewpoint to the subjective process of seeking overlays.
3) Understand the role of our own inherent bias in the handicapping process.

As noted earlier, the price of a given horse, no matter where it ends up, is a result of biased information. Philosophically, given the shortcomings of humans attempting to understand our own behavior and the decisions of others, one should never play short-priced horses. Pragmatically, putting philosophy on the back burner, there is nary a horseplayer alive that can turn profits on a regular basis by betting the odds-on chalk to win. This is regardless of whether this particular favorite is deemed an overlay through a value line or other method of subjective reasoning.

Part III: “Practical Application”

This advice needs to be placed in proper context for practical use. Horizontal bettors, those individuals who prefer to play multiple race tickets in the form of wagers such as the Pick 3, Pick 4, and Pick 6, must use chalk to survive certain legs where beating the favorite is an exercise in futility. In most circumstances, my overall hatred of chalk is limited to accepting a small payout on a favorite to win, no matter what the perceived overlay might be (i.e., 2/1 at post time and “should be” 3/5, for example). It also stems from my lack of confidence in fellow human beings to correctly predict the outcome of a chaotic, isolated event with thousands of moving pieces such as a horse race, on a regular basis. There are too many collective variables at play in a horse race to ever pull the trigger on a low-priced horse to win. Attempting to grind out a small profit carefully spotting plays on overlaid chalk is not my idea of a fun hobby.

My approach to the races in general terms is to concentrate on the following:
1. Avoid low-priced animals in the win pools
2. Concentrate on the final odds of the most likely winner at post time. This approach is similar to the overlay/finding value mindset, without the pre-conditions and qualifiers. Overlay seekers tend to compare their own idea of what the line “should be” to the actual current odds. I could not care less about the “should be” and concentrate purely on the odds of the most likely winner.
3. Construct horizontal/vertical wagers based on double-digit horses
4. What I love about this game is the capacity to invest a relatively small amount of money to win a relatively large amount. I use that credo as a foundation to structure most of my wagers. For example, on Saturday of the 2008 Breeders’ Cup I singled a double digit price, Muhannak, in the Marathon ($26.80), went five deep in the contentious Turf Sprint (and was lucky enough to consider Desert Code a strong contender to win the race), and went three deep in the Dirt Mile covering Albertus Maximus. That $15 spread paid $5,261.10.

Reflexivity is an advanced concept from a brilliant man that is able to, at least in part, tell you why the collective group is often incorrect. My thoughts are the ramblings of a cynical horseplayer. The idea of reflexivity as it relates to the pari-mutuel system is a great exercise to think critically about the approach to profitability. While highly theoretical and sometimes difficult to deconstruct, the practical application is valuable.

JEROD DINKIN is an avid horse racing fan and handicapper. The 2006 Canterbury Park Handicapper of the Year is a three time qualifier to the Horse Player World Series and the NTRA/DRF National Handicapping Championship

[Rverge]

as i read, does one now toss out making ones "odds Lines" for each horse in races?

[RAMON201]

I agree with you 100%. I never bet on any favorite. I never make an 'odds line' or even think about the 'take out' . This I view as a 'TOTAL WASTE OF MY TIME' , finding a horse that I think can win the race and pay me what I consider is a 'fair price' ( over 4/1 at the post ) is all I think about. I could care less that others get caught up in thinking about ' making an odds-line' and looking for 'value' as if they can 'by magic' bet the 'overlay' and it will produce a positive ROI. There are enough distractions in handicapping let alone 'creating more' because some 'misguided ' people tell you so. I also love the double digit horses and for me its worth the wait. My top payoff in win betting was $126.00 and thats extreme but it happens. The $30-$40 horses are out there if you look. So make your 'odds-line and bitch about the take-out' and I'll be looking for the ' money in my pocket' horses.

[Whosonfirst]

Originally Posted by RAMON201

I agree with you 100%. I never bet on any favorite. I never make an 'odds line' or even think about the 'take out' . This I view as a 'TOTAL WASTE OF MY TIME' , finding a horse that I think can win the race and pay me what I consider is a 'fair price' ( over 4/1 at the post ) is all I think about. I could care less that others get caught up in thinking about ' making an odds-line' and looking for 'value' as if they can 'by magic' bet the 'overlay' and it will produce a positive ROI. There are enough distractions in handicapping let alone 'creating more' because some 'misguided ' people tell you so. I also love the double digit horses and for me its worth the wait. My top payoff in win betting was $126.00 and thats extreme but it happens. The $30-$40 horses are out there if you look. So make your 'odds-line and bitch about the take-out' and I'll be looking for the ' money in my pocket' horses.

Ramon, I agree with everything you're saying. You have to pick a winner and then get a fair price. Too much mental masturbation for me to make some artificial odds line to get value. My problem doing this professionally is developing the patience and discipline to only accept odds that will pay double digits. At this moment, I'll still take 5/2 minimum, even though I know the probability that I can't make a long term profit at these odds. Self discipline is the hardest thing about betting the horses, IMO. My first step in honing that skill has been to pass races.

[JimG]

Originally Posted by Whosonfirst

Self discipline is the hardest thing about betting the horses, IMO. My first step in honing that skill has been to pass races.

FWIW, I have found it easier to pass races in the simulcasting era and play from home era, as I usually download 2-3 tracks I intend to review and cherry pick amongst them. If there is a lull of a couple of hours or so, since I am playing from home I can easily find other things to do. For me, it is harder to pass races when at the track or otb and very hard if I am only considering one track.

Jim

[Whosonfirst]

Originally Posted by JimG

FWIW, I have found it easier to pass races in the simulcasting era and play from home era, as I usually download 2-3 tracks I intend to review and cherry pick amongst them. If there is a lull of a couple of hours or so, since I am playing from home I can easily find other things to do. For me, it is harder to pass races when at the track or otb and very hard if I am only considering one track.

Jim

I agree totally. Sometimes I go to OTB for a change, or just to get away from the computer.

[Ted Craven]

Thanks Houndog, and thanks to Jerod Dinkin for posting his article on the HTR site. (I saw it there and printed it out and have been watching some of George Soros' videos on reflexivity since). I think it definitely relates to the notion we know as 'wagercapping', and speaks a lot to what I observe as 'ambivalence' in Doc Sartin's writings on the subject of value (check his recurring remarks about 'the value boys').

Unless you are a whale operation and dutching half the field to break-even and make 8-10% ROI in rebates, the horse still has to win in order to be truly an overlay.

I want to discuss further, but I want to think more first.

Ted

[alydar_ David]

Houndog, thanks for posting such an interesting article.

While I don't completely agree with the author I can appreciate his point of view; and it's very well written.

[BJennet]

Originally Posted by Ted Craven

Thanks Houndog, and thanks to Jerod Dinkin for posting his article on the HTR site. (I saw it there and printed it out and have been watching some of George Soros' videos on reflexivity since). I think it definitely relates to the notion we know as 'wagercapping', and speaks a lot to what I observe as 'ambivalence' in Doc Sartin's writings on the subject of value (check his recurring remarks about 'the value boys').

Unless you are a whale operation and dutching half the field to break-even and make 8-10% ROI in rebates, the horse still has to win in order to be truly an overlay.

I want to discuss further, but I want to think more first.

Ted

Hi Ted,

I missed this post at first, but I think it's worth making a couple of points: one, that Doc Sartin had a fairly limited grasp of probability and statistics that explains the somewhat rambling and contradictory nature of his comments on the subject of 'value', and that the development of 'wagercapping' itself is an acknowledgment of the truth of what the 'value boys', most prominently Dick Mitchell, had been nudging him toward for some time - that he had to take mutuel price into consideration by providing some kind of baseline probability for the performance of his methodology. Surely Doc was right about the concept of an 'overlay' being meaningless, but it's extremely disingenuous to then describe every winner that way.

I believe that one of the most confusing aspects of handicapping and probability for the majority of players (those not using a database) is that they believe that they understand why they won or lost a race. This is never true. At best, they player can only assess probabilities based on their (or their method's) past performance. If your one-horse win rate is, say .30, this means that you're still going to lose .70 of your races. The accuracy of your assessment of the correct winning probability vs. the public is the measure of your performance.

What wagercapping has to do with 'reflexivity', which most people in the investment community have found to be a uselessly vague concept beyond the obvious notion of being cautious, is somewhat mysterious. Possibly you can clarify. I think it would be helpful if the probabilities generated by the BL/BL, which are far from accurate being set to a 130% line, were brought slightly closer to reality. For newer users, I would suggest that simply doubling the probabilities should help, although YMMV.

Hope this doesn't sound too negative, Ted, but these are very tough times for handicappers, as you know, and we can use all the help we can get.

Cheers,

B Jennet

[Ted Craven]

.
I spent a fair amount of time watching videos and reading articles and transcripts by George Soros about his 'reflexivity' concept. In the end, I got as much a summation of its relevance to handicapping and wagering from a few lines in Jerod Dinkin's article as I did from Soros (no poor reflection on him: he's a well spoken philosopher/investor and not a horse-racing specialist), so thanks again, Jerod!

The key observation for me is: in events comprising 'thinking participants' (e.g. people wagering on the outcome of a horse race, people trading stocks, commodities and other financial instruments) - all decisions are made with uncertain and imperfect understanding, thus stock pricing and oddslines are subjective guesses, estimates, and not facts. And these imperfect guesses cause feedback-loops by causing other individuals to respond (by placing bets or avoiding bets) which in turn cause other bettors to reassess their oddslines and their betting actions, etc, etc. It's a chaotic, noisy, messy storm of opinions, actions, counter-actions and modified opinions right up until the bell rings (and after...). And, filled with plenty of odds pricing and guessing mistakes: that's why most horses don't pay between EVEN and 3/2.

You may decide a horse is worth 5-1 and bet it at 6-1, but your own bet (what to speak of the bets of others, either independent of your actions, or in response to your actions) can cause the odds on the horse to go below 5-1, in which case you never would have bet it to start with (and neither would some others in response). Reflexivity; uncertainty; feedback loop.

I've never been able to appreciate the usefulness per-se of the Betting-Line oddsline in any of Doc Sartin's software and I believe he put it in there (the Bottom Line/Betting Line readout) as a 'get off my back' type response to those who nagged him about 'how could you omit such a fundamental aspect of wager decision making - you're not serious'. As it stands, the Betting Line is nowhere close to a 100% or even 120% oddsline because it isn't designed for that purpose (as far as I can understand).

Houndog's original post wondered about the applicability of reflexivity and uncertainty in pre race odds estimation to Sartin's concept of 'wagercapping'. Wagercapping (in my understanding, and sometimes application) involves using your key readouts (e.g. BL/BL), potentially hiding a Top 3 ranked horse having below certain cut-off odds (e.g. 5/2, 2-1) if you have to, then selecting 2 horses from among the remaining Top 3 such that the net odds (and resulting average mutuel) relative to your historical hit rate from doing so, at least breaks even (and presumably better). The keys to making a go of this approach are:

1) reliable readouts which identify horses with excellent chances to win the race (properly selected pacelines, omitted non-win-contenders due to form) - e.g. BL/BL, V/DC,
2) either acceptance of M/L odds as proxies for post-time odds, or waiting until close enough to post-time that you know the odds on your horse(s) won't drop unacceptably,
3) either, insight into when a top ranked low odds horse is the real thing, then to single it or pass that race, OR an emotional equanimity and good records to comfort you when you bet against that top ranked horse in favour of 2 of your next 3 ranked, and it wins anyway.

Wagercapping is not (in my understanding) about taking your 3rd ranked horse at 3-1 on the BL and betting it because it pays at 9/2, or your top ranked horse at 9/5 BL because it pays 5/2 (or both). It is about working with your ratings, composing a bet usually with 2 horses (or perhaps, equally, WP on 1 horse, or W on 1 horse and P on another, etc) such that your net odds (and resulting mutuel) if the lower paying one hits the percentage of the time your records shows it does, combined with the net odds of your higher paying one at its recorded hit rate - will result in a positive ROI over a number of events (e.g. a cycle of 20 bets). And everything is quite imperfect - final odds fluctuate from when you bet, your historical records on hit rate, average mutuel and factor ranking by mutuel (e.g. the traditional 'Wager Decision Form' showing mutuels by BL/BL tier) may fluctuate significantly cycle to cycle, track to track, distance structure to surface, etc - and your knowledge from bet to bet about how low a net mutuel you can accept can be imprecise (and likely a total crap-shoot and mere gambling if you have no records to consult).

I have tried to apply wagercapping (again, as I understand it) for years, and in general often had rather dissatisfying (read: emotionally trying) results. As often as I'd pat myself on the back for 'hiding' the Top BL/BL horse at 2-1 or 6/5 and cashing in on either a 9/2 or 8-1 of my 2 other bets, I would lose my entire bet when that Top ranked 'hidden' horse won. I tried to develop measurements of when to accept the Top ranked horse at face value: 2 points gap on BL, lone VDC #1, lone Early, best Late in a field of challenged Earlies, top 2 betting odds, etc. Sometimes it worked, sometimes it didn't. Maybe I missed something.

The past year or so, I have arrived at a betting practice which respects some things I have observed about myself, and which fits with my longer term goals:

1) I hate to lose money,
2) I feel worse about losing money than I feel great about winning money (see point #1),
3) I want to bet a lot of races and significant money (always relative to my bankroll size, hit rate and advantage - i.e. some flavour of Kelly) and earn good rebates for every bet.

To that end, and perhaps accepting that times have changed since Doc penned his immortal studies and theories, I now never 'hide' any horse from my screen, and consider a 2 horse bet if I can get 3/2 on the low side (i.e. minimum $5 payout for $4 bet, or 25% ROI on that event) and at least 3-1 on the high side (i.e. minimum $8 payout for $4 bet, or 100%). In this, I find myself focusing on the horse and its ranks first, and on odds second. My betting records tell me my choice of 2 horses to win-bet result in a winning wager about 50% of the time on average (though including some wild swings), which is the end result of paceline selection, recency and condition requirements, class of competition, performance in the paceline selected, a few factor readouts, odds ranks from the tote board, and to a certain extent a factor decision model. Most of the time, my odds focus is knowing whether I'll get my 3/2 minimum (and that, for a buffer against sometimes dropping below EVEN after I bet) or more specifically what my low to high range of payouts might be, then passing when I don't like the components of the range. I am now more happy betting a 3/2 and a 3-1, or a 2-1 and a 5-1, and never say no when offered a pair of 3's. Around 8-1 or so, I like to split my wager WP on one of the horses (again, I hate to lose money, and I want to bet frequently and collect rebates). Occasionally I will single my top horse at EVEN odds. Quite simply put, there are many more horses below 3-1 than there used to be, so either we have to get accurate enough to play with this distribution of odds, or play less, waiting for higher odds events. The difference between these two stances is a psychological/emotional one and depends on one's objectives in participating in racing (i.e. casual enjoyment/stimulation versus significant return on capital deployed, requiring betting either more events or higher units - not saying the latter objective cannot also be both enjoyable and stimulating).

But I never spend any time worrying whether I got my oddsline right on my top 3 or 4 horses. I worry about whether my paceline selection is consistent, whether I have reasonably assessed a horse's current form, whether there is too much unknown or unknowable about a given race. I appreciate that when anyone waits for 10-1 (on presumably their top few horses) they buy a lot of room for error but presumably bet less (in the straight pools). And you don't have to worry overly about an accurate oddsline, whatever that is, given how much is subjective and unknowable in race analysis: most horses win at less than 10-1, so it's an easy way of betting 'overlays' - though I appreciate that the skill required to both find them and wait for them is considerable and to be applauded.

Here's a relevant and interesting recent thought by Dick Schmidt (http://www.paceadvantage.com/forum/s...1&postcount=11)

Originally Posted by Dick Schmidt

I have a solution to this problem that is extremely effective and extremely unpopular: don't look. Make your bets without reference to the odds or morning line, then go on to work the next race. Don't watch the odds move, don't watch the race, don't check the results or payoffs until you are done for the day. Spend your time handicapping and then entering the outcome into a good record keeping program when the day is done. So long as your bankroll is larger at the end of the day, no single race, or any group of races matters. Put your time and mental effort where it actually pays off, not watching dumb animals run around or listening to the opinions of other dumb animals betting on them.

I told you that you wouldn't like it, but it is how most professionals play.

So reflexivity = uncertainty = feedback influence when thinking (including crowd/herd responsive) participants are involved. Markets are not efficient, pricing errors (odds mis-estimations) happen EVERY day. That's as much as I understand about reflexivity and wagercapping so far. But always ready to learn more! If anyone has alternate interpretations of what Doc Sartin meant by 'wagercapping', I'm all eyes and ears.

Any and all feedback appreciated.

cheers,

Ted