When betting with a bookie they are effectively selling us the probability of a horse winning. When you buy something, for example a car, you want to know that you’re getting value for money. One garage has your dream car for £14,000 but down the road another garage has the exact same car for £13,500 you would obviously buy it from the second garage. It is exactly the same when striking a bet. We need to get the best odds as possible as we would get the best price possible for the car!
Learning about creating something called a tissue can be a very difficult thing to do but these tissues are a way of determining if we are getting value about our bets. When you look at the Racing Post in the morning and you see the SP forecast betting at the bottom of the card, this is basically an experts “tissue” and his opinion on how the market should be priced up.
It is this value then that inspired a gentleman called John L. Kelly to research how it all worked. He was born in 1923 and came of age during World War II. Having served in the RAF he went on to an undergraduate in Physics. At this early stage of his career it looked like he would possibly venture into the oil industry and on the back of one of the papers he wrote he landed a job with Bell Labs. At the time Bell Labs was one of the most prestigious research centres and this is where Kelly met another gentleman called Shannon. Kelly was apparently a chain smoker and loved his drink having quoted “a lot of fun, the life of the party.”
Kelly’s colourful career continued and he contributed to the talking computer amongst various other things involving bandwiths. His boss Shannon was impressed with Kelly’s insights and on the back of a lecture delivered by Shannon himself Kelly was inspired to create a gambling system that would give the punter an edge.
Kelly and Shannon soon became close friends and worked closely on various projects mainly around gambling. Kelly analysed many systems but of course is famous nowadays for the famous Kelly formula. He came up with the staking plan based on the edge a punter could gain by having inside information. With this information and the calculated edge one could then work out how much of his bank to stake to maximise his returns but also protect him from ruin.
I’m not saying that Kelly’s formula works but I do know a few people who use it in their betting models. It’s only effective if you know your true edge. Of course nowadays that’s not as easy as it used to be with fixed races etc! In Kelly’s time there was some fixed races and if you could find out the outcome then you could use the formula to full effect.
Next week I’ll move onto how Kelly and Shannon went on to beat the casino’s at Black Jack using their new found formula and how a load of students went on to win millions of dollars.
Back next week,