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Betting: The impact of luck and skill

Betting: The impact of luck and skill

It is the question at the root of all betting: why do some people have more success at generating profits than others? Is it easy to learn the required skills, or is luck more important in determining how successful a bettor is?

Paradox of Skill

It is important to bear in mind that bettors do not want to hear that much of what they do is down to fortune. Of course, some games – roulette for example – are clearly down to chance, but those who invest their money in most forms of betting want to believe that their educated choices have a real impact on the outcome. This is particularly complicated in sports betting, when most of what happens is down to luck.
That is not to say bettors cannot do anything to increase their chances of success. In the long run, processing news, following events and taking a deeper look at sports will stand you in better stead than someone who walks in off the street and makes his or her selection by tossing a coin. Yet in practice, there is something more important at play: the paradox of skill.
As a general rule of thumb, chance plays a more significant role in sports which are low-scoring and feature a large number of participants. It is also worth remembering that more sophisticated methods of gathering knowledge which should, in theory, improve betting prospects are often shared across the board. We may all be gaining skills in absolute terms, but individual bettors are not really moving anywhere in relative terms. This means that the difference between the best bettor and the worst bettor gets smaller, which in turn means the role of luck gets bigger. That is why, regardless of the skills we believe we possess, most bettors will end up in the red at some point down the line.

Skilled robots or rather a matter of time before regression kicks in

Botprediction.com is a website which predicts football results and, helpfully in our case, serves as a fine example of the role chances plays in betting. In the total goals market, the site ran 40,000 prediction robots at the same time – similar to a large number of human bettors placing wagers on a match.
The website claims that its software helps gamblers follow the robots who have high win rates above 70 per cent. But when you delve deeper, it becomes clear that there is no real difference between what the robots are doing and flipping a coin. It would therefore be waste of time to follow one of these ‘successful’ robots and assume it will continue to be successful at the same rate. There is, in other words, no consistency between what it predicts today and what it will predict in one week’s time. Before too long, regression to the mean kicks in.

The Luck-skill continuum

In The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, Michael Mauboussin writes that about a luck-skill continuum. Roulette is an example of something far down the luck scale, while chess would be found at the opposite end. The vast majority of team sports sit around the middle. Gambling, according to Mauboussin, is much closer to being pure luck than pure skill.

The environment of skill

When we learn things and develop skills, we usually do so by naturalistic decision-making – a process by which we remember small chunks of information and eventually consolidate this knowledge through continued use of it. For this to work, the environment must be predictable. It is for things like chess, because this is a game mainly about skill, but does it work for betting on sports? When we are dealing with activities which are predominantly about fortune, we should focus on the process much more than the outcome.
This goes against many intuitive beliefs we have about betting, which brings a tangible, monetary award if we correctly predict the result. But we must always remember that this is a zero-sum game. It is not just about choosing winning selections, but also outperforming other bettors in the process. When we compete with others in a betting market, one of the best skills we can possess is the ability to evaluate whether the necessary information has already been incorporated into the odds offered.
So, if two bettors with equal skill levels have impacted upon the price and made it as accurate as possible, it is now a matter of luck whether Bettor A or Bettor B wins. The more efficient the market, the harder it is to outperform the collective wisdom of the crowd.

A zero-validity environment?

We must also take into account the nature of sports. News emerges at random – we do not know when Player A will suffer an injury or when Coach B will resign. This breaks the link between cause and effect, and further increases the role of fortune.
Sports betting is essentially a zero-validity environment, as described by Daniel Kahneman, Nobel prize winner and the author of Thinking, Fast & Slow. The price discovery process relies on guesswork, as we cannot truly know for sure what relationships exist between decisions and outcomes, and whether or not they are causal. Bettors will always believe that there is a causal link between the two – particularly if they are successful – but this is in most cases simply overconfidence and a misunderstanding of how things work.

When does betting become a game of skill?

We have now established that betting is about luck more than skill. But are there circumstances where the activity moves away from the former and towards the latter? Games of repetition are a good example. The more times a game is repeated, the greater the role of skill.
Let us look at tennis. If Roger Federer is 53 per cent more likely to win a point than Rafael Nadal, this translates into an 85 per cent probability that the Swiss will win the match over five sets.
Or take poker as another example. The cards you receive from the dealer is a matter of pure luck. But the more hands you play, the more likely it is that skill will determine how well you perform. We can expect the good and bad fortune to balance out over time, and a player’s skill – itself developed by repetition and learning – should emerge as a more significant factor in determining the outcome.
However, it takes a great deal more repetitions than many people expect for luck to no longer play such a big part in proceedings. In The Signal and the Noise, Nate Silver suggests a skilled poker player could still be in the red after 100,000 hands if he is a victim of misfortune. In that light, two sports bettors can diverge massively even if one is more skilled than the other. It would potentially take a long time for even a three per cent difference in skill to be eliminated; even after 1,000 bets, the more unskilled participant could be ahead if he or she has luck on their side.

Luck will play a big part, especially in the short run

Once we accept that luck plays a huge part in sports betting, we can begin to look at different ways to approach the activity. Choosing markets with a higher variance of skill – which essentially means markets which are less familiar to most bettors and, by extension, the bookmaker – would be a smart starting point. If it is harder to find information about this sport or market, the role of luck becomes smaller and the role of expertise larger. It is much easier to possess a superior understanding, or to have better information of a marginal betting sport than a mainstream betting sport. It would also be wise to think in relative terms. Absolute knowledge is not really significant here; it is much better to know more than your rivals, even if it means knowing less overall. It is much easier to obtain superior information about a minor soccer league than the English Premier League. As this is the case it is logical that it is easier to consistently show a profit betting a smaller sport and/or league than the most popular betting sports and leagues. You should view your fellow bettor, not the bookmaker, as your opponent.
If you are betting in a market where luck dominates, focus on the process of your decisions rather than the outcome of them. Forget your short term returns – you could lose 80 per cent of your bets in October, but if your process is sound then your luck should turn in the long term. Losing money is not always a sign of making the wrong decisions.

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