First, let me say that even if you have a better than average winning percentage you will fail to make profits if you do not use or incorporate a faulty money management system. Professional gamblers, stocks and bonds traders, arbitragers, or any similar professionals understand the necessity of valid money management systems. There are several reasons for the need of such a system. The obvious one is to decrease risk while maximizing profits. Another reason was told to me by Paul Paulson of moneykeg.com and author of Money and the Middle Man. Learn more about individual retirement plans by visiting investing for IRA’s.
He explains, the reason for money management, in my opinion, is so that a bettor can comfortably utilize his edge. Notice that I did NOT say ìmaximizeî his edge. The reason is because if you size your bets solely with the purpose of maximization, you trigger, albeit inadvertently, the biggest obstacle facing bettors ñ psychology. What I am trying to say is that the more you ëoptimizeí your bet size system (what I consider a money management system as opposed to a picking system where you aim to pick the ìwinnerî game, race, etc.), the larger your potential draw downs.
By way of example, letís say you have a bankroll of $10,000. If you ëoptimizeí your bet in a simulation using techniques like, optimum f or the Kelly criterion, then your total bankroll will fluctuate more violently than if you size your bets with a simple 1% total bankroll bet. The ëoptimizedí simulation may draw down your account over 30% in some instances while the latter will likely yield much less than that.
The point is this: How will you ëfeelí about your system after a draw down of 30%? Is it likely that you will continue using the system? Or will your ìbetter judgmentî win out as you add this picking system to the picking systemsí scrap heap? I would venture to guess that most bettors would stop betting the system if a large draw down occurred. The problem is that statistically, a system with a positive expectancy will still have large streaks of winners and losers. If you should be so unfortunate as to start utilizing your strategy just before one of those inevitable losing streaks, then you will experience significant destruction of your funds.
The lesson here is to minimize your draw downs to a level where you feel comfortable. That is, use a bet size where if you experience a string of losers, (which you will) then you will still move forward and still gain that statistical advantage called ëpositive expectancyí. If you make your bet size such that each bet has no significant emotional effect, then you are practicing the proper money management. If a bettor can achieve this, then he will know what it is like to have 13 losers in a row in a good system. More importantly, he will be psychologically stable enough to weather the storm and achieve the profits he deserves for having the ability to foresee such occurrences and plan for them accordingly.
In simple terms, it is important to use a money management system that allows your bet size to be within your comfort level. Using a money management system will help your psychology withstand losing streaks. A bettor should make their bet size in relation to their bankroll small enough that there is no emotional effect on the outcome. This will enable you to stay with a system long enough to see if works.
There are several valid money management systems and some schemes that are not so prudent. Many of these will be discussed in later articles. For now, we will discuss a ìpercentage of bankrollî. In this system, the player will risk a percentage of his current bankroll. For this discussion, we will use a 2% bankroll ratio for the bet. We like this amount because as explained above must people do not have the discipline or stomach to see large losses.
As you can see in the illustration below, we start with a $10,000 bankroll so our first bet will be $200. As our bankroll increases and or decreases so will our bet size. We also make the assumption that we will have a 60% winning probability. Bull Market Sports Handicappers has an average three year winning probability of 64.65% so we will be conservative and use 60% in our illustration. This means that for every 100 bets there will be 60 winners and 40 losers. As you can see in the illustration, one can expect to net $3,493. This makes your total bankroll $13,493 at the end of 100 bets.
We will now compare this to a same size bet system. We will start with the assumption that we will win 60 games with a bet size of $200. This will produce $12,000 in gross winnings. Now take the 40 losers at 220 (donít forget the vigorish) which yields 8,800 in gross losses. The net profit will be $3,200. This is are not bad but not as good as the percentage of bankroll illustration.
Some people who subscribe to the same size bet system will say it is not a fair comparison. They will say that many of the wagers in the bankroll system are greater than $200. The argument is that if you wager more than $200 you will surely show larger profits.
