you are misinterpreting "odds" the odds that trader vic speaks of are not the same as odds at the track. best, surfer
Let's make it 2 to 1 to simplify the arithmetic. If the favorite is 2 to 1, this means that should you take this wager, it will have a positive expectation (ie. "the odds will be in your favor") if the horse's probability of winning the race is greater than 1/3. Otherwise your wager has negative expectation (or zero expectation when the probability equals 1/3). Note that odds are the chances, expressed mathematically, that an event will occur. Odds of n to 1 equal a probability of 1 in (n+1). Do not confuse odds with being the favorite. A generally accepted definition of favorite in sports betting is the competitor seen as having the greatest chance of winning. Sklansky ("Theory of Poker", p. 265) defines favorite as in poker, before all the hands are out, a hand that has the best chance of winning. This is well illustrated at the beginning of American Idol (16 contestants) where Clay Aiken was quoted as 3 to 1 favorite. In the final, with just him and Ruben remaining, I saw him quoted as a 6 to 5 underdog. Precisely. When Trader Vic says "the odds are in your favor", he means "you have a positive expectation".
Lots of people with positive expectations go broke. When I think of odds in trading, I think of past performance that would have some relationship to the present. For instance, assume that a stock price has been down 7 days in a row. What are the probabilities that it will continue traveling down---assuming you also factor in overall market conditions, volume, reason for being down.....etc. Some call this an edge, when the probabilities turn in your favor. At any given time, the future of price movement is unknown and unknowable. However, there are tendencies that have repeated again and again over the long haul. Is selling in May and going away no longer a valid reason to sell in May and go away going forward because it didn't work this time? Are the odds of a fall time frame sell-off sufficient to be a buyer during periods of extreme fear that typically manifest in the fall time frame? During times of extreme fear in the market, fear that we can measure by relationships of buying to selling that were recored during periods in the past, are the odds in your favor when you buy extreme fear and sell extreme greed? To me this is playing the odds, the probabilities. If we break to new highs on volume, do the odds favor continuation? If we fail to break to new highs for a third time, resulting in a triple top formation, do the odds favor selling? To me, this is the difference between gambling and speculation. Gambling is based on luck, a random event, and speculation is using the mind to evaluate data points from the past, and apply them to the present in an attempt to predict the future price move----whether the time frame is minutes or months. Some traders are able to make money with consistency. Either they are damn lucky year after year, or they are finding an edge that puts the probabilities in their corner.
As someone who has supported himself for extended periods by betting on horse racing, I'd like to correct a misconception about a horse's odds that has been assumed during this thread. A horse's tote board odds in a race are determined SOLELY by how much money has been wagered on him by the betting public ---- this is the entire basis of pari-mutuel wagering. Those odds, whatever they are, MAY or MAY NOT be a relatively accurate representation of a horse's true chances of winning. Money is made over the long haul in games like horse racing when the smart bettor is more accurate, more often, about the actual, real chances of a horse than is the betting public at large. Precisely because the odds of a horse --- determined solely by the mass of bettors ---- can be and often are very inaccurate, the game can be beaten, and beaten significantly by wagering on horses whose offered payoffs are significantly larger than their true chances of winning, and whose winnings, accumulating probabilistically over a large series of bets, will recoup in spades the cost of all losing tickets.
Thanks for the explanation. I have a question. If the odds are based "solely on how much money has been wagered ... by the betting public", how can the first person who makes a bet make the bet? Don't initial odds have to be set by the house? Thanks.
Armaniman, Do you wager on the Throroghbreds, Harness, or both? I read Dr. Z's book and it changed the way I saw the betting pool. I know about Beyers - Is there anything (else) out there that you would recommend as a good book/website to read through? nitro
once again, 777, you are misinterpreting words to fit your world view. positive expectation has an exact meaning when speaking of trading--but over all excellent points. best, surfer
I always seem to misinterpret words that don't fit your world view. What is it like to never be on the other side of misinterpretation? ex·pec·ta·tion ( P ) Pronunciation Key (kspk-tshn) n. The act of expecting. Eager anticipation: eyes shining with expectation. The state of being expected. Something expected: a result that did not live up to expectations. expectations Prospects, especially of success or gain. Statistics. The expected value of a random variable. The mean of a random variable. expectation \Ex`pec*ta"tion\n. [L. expectio. exspectio: cf. F. expectation.] 1. The act or state of expecting or looking forward to an event as about to happen. ``In expectation of a guest.'' --Tennyson. My soul, wait thou only upon God, for my expectation is from him. --Ps. lxii. 5. 2. That which is expected or looked for. Why our great expectation should be called The seed of woman. --Milton. 3. The prospect of the future; grounds upon which something excellent is expected to happen; prospect of anything good to come, esp. of property or rank. His magnificent expectations made him, in the opinion of the world, the best match in Europe. --Prescott. By all men's eyes a youth of expectation. --Otway. 4. The value of any chance (as the prospect of prize or property) which depends upon some contingent event. Expectations are computed for or against the occurrence of the event. 5. (Med.) The leaving of the disease principally to the efforts of nature to effect a cure. Expectation of life, the mean or average duration of the life individuals after any specified age. Syn: Anticipation; confidence; trust. Source: Webster's Revised Unabridged Dictionary, © 1996, 1998 MICRA, Inc. expectation n 1: belief about (or mental picture of) the future [syn: outlook, prospect] 2: wishing with confidence of fulfillment [syn: anticipation] 3: the feeling that something is about to happen 4: the sum of the values of a random variable divided by the number of values [syn: arithmetic mean, first moment, expected value] Source: WordNet ® 1.6, © 1997 Princeton University