WEBVTT 1 00:00:08.519 --> 00:00:12.160 Good afternoon. You're listening to Gambling with an Edge. 2 00:00:12.359 --> 00:00:16.280 Now Here are your hosts, Bob Dancer and Richard Munchkin. 3 00:00:17.000 --> 00:00:19.399 Good afternoon, Welcome to Gambling with an Edge on Bob 4 00:00:19.480 --> 00:00:21.440 Dancer and I'm Richard Munchkin. 5 00:00:22.039 --> 00:00:25.760 Our guest today is poker player and sports better Dan Abrams, 6 00:00:25.800 --> 00:00:29.960 who has written a new book entitled Sharp Money. Dan Abrams, 7 00:00:30.199 --> 00:00:32.640 Welcome to Gambling with an Edge. 8 00:00:32.880 --> 00:00:35.640 Thank you, thanks for having me by training. 9 00:00:35.679 --> 00:00:38.840 You're an engineer. How did you get started playing poker? 10 00:00:39.920 --> 00:00:44.240 Well, like a lot of people in America, when the 11 00:00:44.280 --> 00:00:48.119 World Series of Poker started being broadcast on ESPN in 12 00:00:48.119 --> 00:00:51.679 two thousand and three. That was the year that Chris 13 00:00:51.719 --> 00:00:54.799 Moneymaker won the main event, and it became a very 14 00:00:54.880 --> 00:00:59.520 very big deal because he won an online satellite to 15 00:00:59.560 --> 00:01:02.880 even get into the main event, and then he wound 16 00:01:02.960 --> 00:01:06.840 up winning and it became really riveting television, and they 17 00:01:06.840 --> 00:01:10.120 would put it on after you know, Sunday night baseball 18 00:01:10.239 --> 00:01:14.560 or whatever games they had going. So I really kind 19 00:01:14.560 --> 00:01:18.519 of got interested that way. I had played poker just 20 00:01:18.640 --> 00:01:22.879 for fun with my friends even as young as elementary school, 21 00:01:23.239 --> 00:01:25.840 but never really played it for money before. And then 22 00:01:26.159 --> 00:01:29.400 you know, when when some guy wins two and a 23 00:01:29.439 --> 00:01:32.840 half million dollars playing poker. It piques a lot of 24 00:01:32.840 --> 00:01:33.959 people's interest. 25 00:01:34.519 --> 00:01:37.879 So you're really known for RAZ, and you did a 26 00:01:37.920 --> 00:01:42.280 lot of teaching of RAZ, and so can you explain 27 00:01:42.439 --> 00:01:44.879 sort of how that evolution happened. 28 00:01:46.120 --> 00:01:50.480 Yeah, So the most popular game obviously was no Limit 29 00:01:50.560 --> 00:01:54.760 Hold Them, but most of the online sites would spread 30 00:01:55.079 --> 00:01:58.640 other types of games, including seven Card Stud, which I 31 00:01:58.719 --> 00:02:01.280 was familiar with from playing as a kid and as 32 00:02:01.319 --> 00:02:04.920 a teenager. So I started playing that for a while 33 00:02:04.920 --> 00:02:07.760 and I got pretty good at that, and I had 34 00:02:07.920 --> 00:02:12.280 seen RAS covered on TV and I understood a little 35 00:02:12.280 --> 00:02:17.120 bit about it, but I was primarily concentrating on STUD. 36 00:02:17.560 --> 00:02:19.960 And then I went through a period of several days 37 00:02:19.960 --> 00:02:22.520 where I couldn't even get a decent starting hand, and 38 00:02:22.599 --> 00:02:25.000 if I did, you know, if I got something like 39 00:02:25.360 --> 00:02:29.080 split jacks, somebody with a king would raise and then 40 00:02:29.120 --> 00:02:31.479 an ace would re raise him and I'd have to fold. 41 00:02:32.159 --> 00:02:34.400 And I thought, well, let me give this RAZ game 42 00:02:34.439 --> 00:02:37.800 a try, because the starting hands I tend to get 43 00:02:38.039 --> 00:02:40.000 seemed to be much better for RAS than they are 44 00:02:40.080 --> 00:02:43.719 for STUD. And I just started at the lowest possible stakes, 45 00:02:43.800 --> 00:02:46.240 really to get my feet wet, and I found out 46 00:02:46.240 --> 00:02:48.800 that there weren't a whole lot of good players at 47 00:02:48.840 --> 00:02:52.520 those stakes on like No Limit Hold Them, where you 48 00:02:52.560 --> 00:02:56.159 could multi table so easily, that the good players would 49 00:02:56.159 --> 00:02:57.919 play at the low stakes, but they would play like 50 00:02:58.000 --> 00:03:00.800 twelve or sixteen tables at a time, and that's how 51 00:03:00.800 --> 00:03:01.719 they would win money. 52 00:03:02.639 --> 00:03:06.599 And what was it about REZ that drew you to 53 00:03:06.639 --> 00:03:10.240 it other than the fact that usually it's not where 54 00:03:10.280 --> 00:03:13.280 all the sharpest people are when you know, kind of 55 00:03:13.319 --> 00:03:15.599 go away from the mainstream. 56 00:03:16.560 --> 00:03:19.759 Yeah, exactly. And what you could do on the online 57 00:03:19.800 --> 00:03:22.759 sites is you could keep track of players that you 58 00:03:22.879 --> 00:03:26.240 had played before. You could take notes on them or 59 00:03:26.319 --> 00:03:29.280 assign like a color code to them. And I found 60 00:03:29.400 --> 00:03:31.840 that a lot of the players that I was going 61 00:03:31.960 --> 00:03:34.439 up against in RAZ that were really bad at it, 62 00:03:34.879 --> 00:03:37.159 I had notes on them as being very good No 63 00:03:37.240 --> 00:03:40.960 Limit Hold Them players, And I began to realize that 64 00:03:41.000 --> 00:03:43.800 it's really very much the opposite of No Limit Hold 65 00:03:43.840 --> 00:03:46.680 Them in so many ways that the people who were 66 00:03:47.120 --> 00:03:50.280 trying it and trying to play the same way they 67 00:03:50.319 --> 00:03:53.080 played in the Limit Hold Them were really really bad. 68 00:03:53.800 --> 00:03:57.080 So I really got interested that way and started to 69 00:03:57.080 --> 00:04:00.080 do a little bit of studying of the game, and 70 00:04:00.120 --> 00:04:03.319 there really wasn't much. There was not There was only 71 00:04:03.439 --> 00:04:07.680 really one book that had was completely about Raz and 72 00:04:07.680 --> 00:04:12.360 that was Sklansky on Poker by David Splansky. So I 73 00:04:12.439 --> 00:04:14.479 got that and I read it and I was making 74 00:04:14.479 --> 00:04:17.399 all sorts of notes, trying to study it like a textbook, 75 00:04:18.399 --> 00:04:21.199 and he does like example hands at the end of 76 00:04:21.199 --> 00:04:25.279 the book, and for one of them, he said, in 77 00:04:25.319 --> 00:04:29.079 this situation, you should fold unless there's a lot of 78 00:04:29.079 --> 00:04:32.279 money in the pot. And I thought, oh, geez, well, 79 00:04:32.279 --> 00:04:33.800 I don't know how much a lot of money is 80 00:04:33.839 --> 00:04:38.879 to him, right, So I tried to figure it out 81 00:04:38.879 --> 00:04:41.720 on my own to see it kind of solve it backwards, 82 00:04:41.720 --> 00:04:43.959 to see how much money there would need to be 83 00:04:44.120 --> 00:04:46.720 in the pot to make it worth calling in that 84 00:04:46.800 --> 00:04:50.600 situation rather than fold. And what I came up with 85 00:04:50.839 --> 00:04:53.000 was that it was really a very small amount of 86 00:04:53.040 --> 00:04:55.720 money to be in the pot at that point in 87 00:04:55.759 --> 00:04:58.839 the hand. And so I was like, huh, maybe there's 88 00:04:59.560 --> 00:05:04.720 there's room to investigate Raz here that' Sklansky hadn't really covered. 89 00:05:05.279 --> 00:05:06.920 And that's what really got me rolling. 90 00:05:08.079 --> 00:05:14.079 You said you switched games because you were card dead, 91 00:05:14.920 --> 00:05:20.279 which is a type of betting a trend, reasoning that 92 00:05:20.360 --> 00:05:24.879 you're now strongly opposed to as an investor. Now you're 93 00:05:25.000 --> 00:05:28.519 very much an expert investor now, but when you but 94 00:05:28.720 --> 00:05:33.519 using that reasoning for starting RAS seem like a very 95 00:05:33.519 --> 00:05:34.240 ploppy move. 96 00:05:35.040 --> 00:05:39.120 Is that fair? Oh yeah, it's very fair. I mean 97 00:05:39.279 --> 00:05:43.040 I've made all sorts of mistakes in when I started investing, 98 00:05:43.079 --> 00:05:47.519 when I started playing poker. You know, the same type 99 00:05:47.560 --> 00:05:52.000 of thoughts that most people are thinking when they do that. 100 00:05:52.399 --> 00:05:55.120 I just managed to analyze them a little bit and 101 00:05:55.439 --> 00:05:56.680 overcome those mistakes. 102 00:05:57.839 --> 00:06:03.399 So how did the You obviously went from begin a 103 00:06:03.439 --> 00:06:06.959 RES player to one of the top RES players out 104 00:06:06.959 --> 00:06:11.800 there and became kind of a teacher at a site 105 00:06:12.480 --> 00:06:16.040 that people tended to really flock to to learn more 106 00:06:16.040 --> 00:06:18.079 about RES. How did that come about? 107 00:06:19.600 --> 00:06:23.000 Well, it's kind of a roundabout story, which I tell 108 00:06:23.040 --> 00:06:26.079 in the book, is that I was looking to do 109 00:06:26.639 --> 00:06:32.079 some one on one poker coaching for RAZ, specifically because 110 00:06:32.079 --> 00:06:37.279 I noticed that at stakes above the level that I 111 00:06:37.399 --> 00:06:40.160 was bankrolled to play, there would be a lot of 112 00:06:40.199 --> 00:06:44.680 players who really didn't know what they were doing at 113 00:06:44.800 --> 00:06:48.680 RAZ at all. They were just hunting away money. And 114 00:06:48.720 --> 00:06:50.439 I thought, well, if I can get a few of 115 00:06:50.480 --> 00:06:53.399 these guys to be interested in one on one coaching 116 00:06:53.879 --> 00:06:56.399 to make a little money on the side doing that, 117 00:06:57.279 --> 00:06:59.959 So I was looking for perspective students, and I had 118 00:07:00.040 --> 00:07:04.199 had the occasion to be looking at the forums on 119 00:07:04.319 --> 00:07:07.199 two plus two if you If you recall, two plus 120 00:07:07.199 --> 00:07:11.800 two Publishing has a huge set of forums that were 121 00:07:11.879 --> 00:07:15.160 very very popular back in the day, and they had 122 00:07:15.560 --> 00:07:17.920 a couple of hands that were played by one of 123 00:07:18.240 --> 00:07:22.639 the top no limit hold'em tournament players and they they 124 00:07:22.680 --> 00:07:25.000 had they could show the hand history, and they were 125 00:07:25.480 --> 00:07:28.680 they were really played badly. So I looked up the 126 00:07:28.720 --> 00:07:31.720 guy's profile and he had his email address in the profile. 127 00:07:31.759 --> 00:07:33.480 So I sent him an email and I said, hey, look, 128 00:07:34.279 --> 00:07:38.240 I'm a RAZ specialist. I play the game almost exclusively. 129 00:07:38.399 --> 00:07:43.079 I've done all this research and if you would be interested, 130 00:07:43.399 --> 00:07:46.399 I would like to coach you. And I basically gave him, 131 00:07:46.439 --> 00:07:49.439 like some some free example hands to take a look 132 00:07:49.480 --> 00:07:52.759 at to see what he thought. It ended up he 133 00:07:52.800 --> 00:07:55.360 didn't and he didn't wind up taking me on as 134 00:07:55.399 --> 00:07:59.000 a coach, But later on he apparently talked to some 135 00:07:59.040 --> 00:08:01.439 of his friends about it, and they were starting up 136 00:08:01.600 --> 00:08:04.839 a poker training site, so they reached out to me 137 00:08:04.879 --> 00:08:08.040 and said, would you be interested in making videos on RAZ? 138 00:08:08.800 --> 00:08:10.759 And so that's how I got that gig. 139 00:08:11.560 --> 00:08:13.279 Are those videos still out there? 140 00:08:14.680 --> 00:08:21.040 No, actually they're not. They had a that site ended 141 00:08:21.120 --> 00:08:23.600 up being bought by card Runners, which was a much 142 00:08:23.639 --> 00:08:28.000 bigger site, and I eventually made some videos for card Runners. 143 00:08:28.040 --> 00:08:30.199 So actually, if you look on YouTube, you can see 144 00:08:30.199 --> 00:08:34.039 some of the snippets that card Runners would put out 145 00:08:34.399 --> 00:08:37.320 as like, you know, five minute trailer of my videos. 146 00:08:37.600 --> 00:08:39.399 There's still a few of those on YouTube if you 147 00:08:39.440 --> 00:08:39.960 look them up. 148 00:08:40.559 --> 00:08:43.879 Can can you still find RAS games? Are there? I 149 00:08:43.919 --> 00:08:46.720 assume there's a RAS tournament in the World Series. 150 00:08:47.639 --> 00:08:51.279 Yeah. The World Series now has two RAZ tournaments every year, 151 00:08:52.080 --> 00:08:54.960 and of course they have mixed game tournaments. It's probably 152 00:08:54.960 --> 00:08:58.279 about seven or eight of them each year that include RAZ. 153 00:08:58.639 --> 00:09:01.120 It's part of like a horse game or an eight 154 00:09:01.159 --> 00:09:04.279 game mix and that sort of thing. And they have 155 00:09:05.320 --> 00:09:10.600 there's some sites online sites that will feature RAZ still, 156 00:09:11.919 --> 00:09:15.200 but mostly in the US. You can only play in 157 00:09:15.279 --> 00:09:20.000 certain states unless you use crypto sites. So the crypto 158 00:09:20.039 --> 00:09:23.120 site called Fena that still has RAS and they get 159 00:09:23.200 --> 00:09:24.679 RAZ games going occasionally. 160 00:09:25.720 --> 00:09:27.720 Are you still actively playing or no? 161 00:09:28.799 --> 00:09:31.960 Yeah? At this point, you know, just every once in 162 00:09:31.960 --> 00:09:34.120 a while. I think the games are so sporadic but 163 00:09:34.960 --> 00:09:36.399 I will play when they're available. 164 00:09:38.200 --> 00:09:41.360 Now it's it's well known that a number of very 165 00:09:41.360 --> 00:09:46.320 successful poker players have lost a ton of money betting sports. Yeah, 166 00:09:46.360 --> 00:09:49.200 didn't that give you pause before you went that route? 167 00:09:49.200 --> 00:09:51.720 And how did you assume your journey would be different 168 00:09:51.759 --> 00:09:52.240 than theirs? 169 00:09:53.279 --> 00:09:55.320 It gave me a lot of pause, you know. I 170 00:09:55.360 --> 00:09:59.279 started playing poker probably the end of two thousand and three, 171 00:09:59.759 --> 00:10:03.480 and and I didn't start betting sports until twenty twenty. 172 00:10:03.759 --> 00:10:05.960 And I really never intended to bet sports at all, 173 00:10:06.039 --> 00:10:10.440 because I'd heard from several people that that's the best 174 00:10:10.440 --> 00:10:13.159 way for a poker player, a good poker player to 175 00:10:13.200 --> 00:10:16.360 lose money, to start betting sports. But they had a 176 00:10:17.159 --> 00:10:21.080 site in Pennsylvania where I lived at the time, which 177 00:10:21.240 --> 00:10:24.360 was Poker Stars for Poker, But then they also had 178 00:10:24.360 --> 00:10:29.200 a section for sports betting through Fox Bet, and so 179 00:10:29.240 --> 00:10:32.159 they would send promotions to me all the time, saying, 180 00:10:32.240 --> 00:10:35.360 you know, here's an odds boost or a free bet 181 00:10:35.480 --> 00:10:38.159 or whatever to try to get me interested in sports betting. 182 00:10:38.759 --> 00:10:40.759 So I reached out to my friend Eric, who I 183 00:10:40.759 --> 00:10:43.399 had played poker with for years, and he had started 184 00:10:43.399 --> 00:10:48.240 sports betting, and I sought out his advice and started playing. 185 00:10:48.039 --> 00:10:51.120 Through that, and are you still doing that? 186 00:10:52.000 --> 00:10:55.399 Yes, I mean Fox bet is no more they shut down, 187 00:10:55.919 --> 00:10:59.759 but I'm still actively sports betting and you still doing 188 00:10:59.799 --> 00:11:00.240 well with that. 189 00:11:01.399 --> 00:11:05.039 So one of the things that really caught my eye 190 00:11:05.320 --> 00:11:10.360 in the book was your discussion about why it may 191 00:11:10.399 --> 00:11:13.240 be a good thing to over bet your bankroll when 192 00:11:13.240 --> 00:11:16.399 you're starting out and have a small bankroll. So you 193 00:11:16.559 --> 00:11:17.639 can we talk about that. 194 00:11:18.840 --> 00:11:23.360 Yeah, sure, that's the sort of thing that is actually 195 00:11:23.399 --> 00:11:27.039 being talked about in financial circles by a lot of 196 00:11:27.080 --> 00:11:32.320 academics because, you know, they want to guide people in 197 00:11:32.399 --> 00:11:37.279 how to construct the portfolio, and you know, you want 198 00:11:37.320 --> 00:11:40.559 to have a certain amount of risk associated with your portfolio, 199 00:11:41.559 --> 00:11:44.919 but not too much risk because you know you want 200 00:11:44.919 --> 00:11:48.000 to protect it. Same thing with your bankroll. But they 201 00:11:48.080 --> 00:11:50.960 realize that the amount of money you have in your 202 00:11:50.960 --> 00:11:55.480 portfolio now doesn't represent the whole story. You have to 203 00:11:55.519 --> 00:11:58.679 take into account how much future earnings you're going to have. 204 00:11:59.279 --> 00:12:02.240 So somebody close to retirement should be a lot more 205 00:12:02.279 --> 00:12:09.080 conservative with their bankroll or their portfolio then somebody in 206 00:12:09.120 --> 00:12:12.080 their twenties or thirties should be. And they actually did 207 00:12:12.120 --> 00:12:15.759 a lot of very complicated academic research to prove this 208 00:12:15.919 --> 00:12:19.399 point and so I said, well, the same thing can 209 00:12:19.480 --> 00:12:23.320 apply equally well to sports betting. I mean, when you 210 00:12:23.600 --> 00:12:26.879 have when you're at a professional level and you have 211 00:12:26.919 --> 00:12:30.200 a bankroll, say in the millions, are close to it, 212 00:12:30.279 --> 00:12:33.559 that's very hard to replace. But if you're doing it 213 00:12:33.679 --> 00:12:37.039 on the side where you're earning an income from a 214 00:12:37.159 --> 00:12:40.879 job and you're using a certain amount set size as 215 00:12:40.919 --> 00:12:43.919 your bankroll, if you have to, if you go bust 216 00:12:44.000 --> 00:12:46.120 on that bankroll and you have to replenish it, and 217 00:12:46.159 --> 00:12:48.240 say you take three or four months to replenish it, 218 00:12:48.879 --> 00:12:52.279 that's not a disaster. You take a break, but you're 219 00:12:52.279 --> 00:12:55.000 not out of the game. And the whole idea of 220 00:12:55.039 --> 00:12:58.559 protecting your bank roll is if you lose your whole bankroll, 221 00:12:58.600 --> 00:13:02.039 you're out of the game. You can't bet anymore, and 222 00:13:02.120 --> 00:13:05.639 you can't take advantage of your edge anymore at that point. 223 00:13:06.279 --> 00:13:09.759 So it's really and it was the sort of thing 224 00:13:09.960 --> 00:13:12.799 in poker that was very, very common and probably still 225 00:13:12.919 --> 00:13:16.399 is for the younger players where they would take shots 226 00:13:16.519 --> 00:13:19.720 at higher levels and I did as well, you know 227 00:13:19.759 --> 00:13:22.519 when I was starting out. You know, they'll they'll take 228 00:13:22.600 --> 00:13:25.320 set aside, maybe twenty percent of their bank roll and say, okay, 229 00:13:25.320 --> 00:13:27.799 I'm going to go up a couple of levels and 230 00:13:27.799 --> 00:13:31.039 see if I can beat them. And if they can, 231 00:13:31.159 --> 00:13:33.879 they stay at those levels and can earn a lot 232 00:13:33.919 --> 00:13:37.480 more per hour. They don't, you know, they lose twenty 233 00:13:37.480 --> 00:13:40.080 percent of their bank roll. They step back down and 234 00:13:40.080 --> 00:13:42.200 they start grinding it back up, but they're at the 235 00:13:42.279 --> 00:13:43.399 regular stakes. 236 00:13:44.120 --> 00:13:44.360 Yeah. 237 00:13:44.399 --> 00:13:48.519 I remember when I was starting out, I knew one 238 00:13:48.559 --> 00:13:52.120 blackjack player in particular who had a ten thousand dollars 239 00:13:52.159 --> 00:13:55.480 bank roll and he was out betting two hands of 240 00:13:55.559 --> 00:14:00.399 five hundred and I thought he was absolutely insane. But 241 00:14:00.960 --> 00:14:04.120 you know, he happened to run well, and he ran 242 00:14:04.200 --> 00:14:08.559 it up to one hundred K. And and I don't know, 243 00:14:08.639 --> 00:14:10.559 I mean, he didn't have a job at the time. 244 00:14:10.919 --> 00:14:13.240 You know, that was what he was planning to do. 245 00:14:13.320 --> 00:14:17.559 But you know, I guess in retrospect, well, yeah, if 246 00:14:17.559 --> 00:14:20.399 he lost it, well he could go back and get 247 00:14:20.440 --> 00:14:23.720 a job and build up a bankroll and start over. 248 00:14:23.919 --> 00:14:26.879 But it was certainly more risk than I was willing 249 00:14:26.919 --> 00:14:27.320 to take. 250 00:14:28.600 --> 00:14:31.480 Yeah, I when I talked a similar point in my 251 00:14:31.600 --> 00:14:34.960 video poker classes, I would make the point that when 252 00:14:35.000 --> 00:14:38.720 you're twenty five and you'd go broke, it's not a 253 00:14:38.759 --> 00:14:41.679 good thing. But when you're seventy and go broke as 254 00:14:41.720 --> 00:14:46.039 a disaster, And so when you're starting out you have 255 00:14:46.240 --> 00:14:50.200 so many more options of ways to get the money back, 256 00:14:50.879 --> 00:14:55.120 and when you're seventy, your best money making options are over. 257 00:14:55.919 --> 00:14:59.279 So I did it in terms of age rather than wealth, 258 00:14:59.360 --> 00:15:01.080 But it's a simil principle, I think. 259 00:15:01.720 --> 00:15:06.080 Well, I think also about when you're twenty five, or 260 00:15:06.279 --> 00:15:11.759 when I was twenty five, my lifestyle was pretty spartan. 261 00:15:11.879 --> 00:15:14.799 I would never stay in a motel better than Motel 262 00:15:14.960 --> 00:15:19.039 six or whatever was the cheapest possible thing I could find. 263 00:15:19.639 --> 00:15:21.200 But you know, you reach. 264 00:15:21.039 --> 00:15:23.600 A certain point in your life where I'm not going 265 00:15:23.679 --> 00:15:26.519 to stay in Motel six anymore, you know what I mean, 266 00:15:26.679 --> 00:15:30.080 Like you're used to more comforts as you get older 267 00:15:30.080 --> 00:15:33.960 and your bankroll grows, and so yeah, I totally agree 268 00:15:34.000 --> 00:15:37.039 with you that there's a big difference going growth later. 269 00:15:38.000 --> 00:15:41.639 Yeah. Absolutely. And you know when I was in my twenties, 270 00:15:41.639 --> 00:15:43.639 I stayed at Motel five and a half. I mean 271 00:15:43.679 --> 00:15:47.399 I couldn't emplord Motel six. So I know where you're 272 00:15:47.399 --> 00:15:47.919 coming from. 273 00:15:48.600 --> 00:15:52.679 Yeah. Now, when you were in sports betting, you developed 274 00:15:52.759 --> 00:16:01.360 a theory of increasing expected growth as a better theory 275 00:16:01.440 --> 00:16:06.200 then increasing expected value. So how did that work in 276 00:16:06.279 --> 00:16:11.919 sports and does that go well with investing in other things? 277 00:16:12.600 --> 00:16:17.879 Well, in sports, really, you know your end goal is 278 00:16:17.960 --> 00:16:23.159 to increase the size of your bank roll, and the 279 00:16:23.240 --> 00:16:27.799 first step to doing that is finding positive expected value 280 00:16:27.879 --> 00:16:31.279 opportunities that are going to lead to winning more in 281 00:16:31.279 --> 00:16:36.440 the long term than you lose. But that the expected 282 00:16:36.519 --> 00:16:40.480 value of a bet or a play doesn't take into 283 00:16:40.519 --> 00:16:44.240 account the level of risk you have to endure. That's 284 00:16:44.279 --> 00:16:46.919 why there is such a thing as the Kelly criterion. 285 00:16:47.120 --> 00:16:51.399 Cally criterion says, Okay, if you have positive expected value, 286 00:16:51.559 --> 00:16:56.360 here's the optimal amount to stake on that bet, maybe 287 00:16:56.399 --> 00:16:59.759 one percent, three percent, five percent of your bank roll. 288 00:17:00.360 --> 00:17:02.879 But why is there an optimal amount? Why isn't ten 289 00:17:02.919 --> 00:17:04.960 percent of your bankroll better? A twenty percent of your 290 00:17:04.960 --> 00:17:08.960 bankroll better? Well, in terms of expected value, the most 291 00:17:09.039 --> 00:17:12.680 expected value you're going to get in terms of absolute 292 00:17:12.759 --> 00:17:15.559 dollars is if you find a big edge, you put 293 00:17:15.559 --> 00:17:17.400 one hundred percent of your bank roll on it, and 294 00:17:17.440 --> 00:17:21.000 that's the most expected value you can get. And obviously 295 00:17:21.039 --> 00:17:24.160 it only takes or one or two times or one 296 00:17:24.200 --> 00:17:27.440 time losing with one hundred percent of your bankroll on 297 00:17:27.480 --> 00:17:30.640 a play that you go bust and then you can't 298 00:17:30.680 --> 00:17:35.200 take advantage of any more plus EV opportunities. So the 299 00:17:35.839 --> 00:17:39.319 idea that you want to increase your expected bank roll 300 00:17:40.279 --> 00:17:43.640 actually takes into account the amount of risk that you're 301 00:17:43.680 --> 00:17:50.799 taking and balances it with the positive ev that you 302 00:17:50.880 --> 00:17:54.519 can get based on your edge. The same I didn't 303 00:17:54.559 --> 00:17:57.240 know it at the time when I first started looking 304 00:17:57.240 --> 00:18:00.960 into it, but the same principle exists in investing. It 305 00:18:01.160 --> 00:18:04.839 just goes by a different name called risk adjusted returns. 306 00:18:05.359 --> 00:18:09.000 So you can expect to get a certain return from 307 00:18:09.559 --> 00:18:12.799 like a mutual fund, a stock mutual fund, and say 308 00:18:12.839 --> 00:18:16.319 it's ten percent a year is your expected return. If 309 00:18:16.319 --> 00:18:21.160 that's coming from a stock mutual fund that it mostly has, 310 00:18:21.319 --> 00:18:24.279 you know, very large cap stocks and it doesn't move 311 00:18:24.319 --> 00:18:27.799 around very much from year to year, that may be 312 00:18:27.839 --> 00:18:30.160 a very good investment to put a lot of money in. 313 00:18:30.240 --> 00:18:34.960 Whereas another fund that also has ten percent expected returns 314 00:18:35.000 --> 00:18:39.240 per year but uses you know, micro like penny stocks 315 00:18:39.240 --> 00:18:42.839 that have huge volatility from year to year, that may 316 00:18:42.880 --> 00:18:44.960 not be a very good investment because you're not getting 317 00:18:45.000 --> 00:18:48.359 any more return for the risks that you have to bear. 318 00:18:48.759 --> 00:18:51.359 And it's really when you do the math. The math 319 00:18:51.599 --> 00:18:54.160 is identical in both situations. 320 00:18:55.079 --> 00:18:58.480 Yeah, I think that. You know, the thing that people 321 00:18:58.680 --> 00:19:04.480 miss about Bett and Kelly is the variance part of 322 00:19:04.519 --> 00:19:08.119 the equation. Right, there's a big difference between if you're 323 00:19:08.160 --> 00:19:13.000 playing blackjack with a one percent edge, but your variance 324 00:19:13.079 --> 00:19:16.119 is only one point one. That's a big difference than 325 00:19:16.200 --> 00:19:19.160 having a one percent edge on a slot machine, where 326 00:19:19.200 --> 00:19:23.440 your variance might be you know, two hundred or something. 327 00:19:24.759 --> 00:19:29.640 Oh absolutely, yes, that's really the key point is that 328 00:19:30.720 --> 00:19:35.440 you have to account for both, and the variance is 329 00:19:35.519 --> 00:19:39.960 going to hurt just about everybody. It's going there's gonna 330 00:19:39.960 --> 00:19:43.039 be one person that's really lucky. You know, you find 331 00:19:43.039 --> 00:19:46.079 one hundred people playing the slot machines, and one of 332 00:19:46.119 --> 00:19:49.200 them is going to be really lucky and take home 333 00:19:49.480 --> 00:19:54.119 a huge payday. The other ninety nine are not, And 334 00:19:54.240 --> 00:19:57.440 so if you're not the luckiest of the bunch, the 335 00:19:57.559 --> 00:19:59.599 variance is going to hurt you a lot more than 336 00:19:59.599 --> 00:20:00.759 it helps. 337 00:20:01.359 --> 00:20:07.160 Well, one thing about Kelly and sports betting is if 338 00:20:07.240 --> 00:20:12.160 you can if you're if your formula says you should bet, 339 00:20:13.440 --> 00:20:18.480 however many dollars, you often can't get that many dollars down. 340 00:20:19.039 --> 00:20:25.160 You might be limited by by either the book's that big, 341 00:20:25.319 --> 00:20:28.519 or they can limit you personally to you can bet 342 00:20:28.519 --> 00:20:32.119 any amount you want up to ninety nine cents. 343 00:20:32.720 --> 00:20:35.960 Does that get I remember when Elihu was on the 344 00:20:36.000 --> 00:20:39.400 show and he said, at some point, Kelly just doesn't 345 00:20:39.440 --> 00:20:42.720 matter anymore because, basically because of the limits, once your 346 00:20:42.759 --> 00:20:46.079 bank roll is big enough, you you could never bet 347 00:20:46.240 --> 00:20:50.000 as much as you wanted because the sports books just 348 00:20:50.039 --> 00:20:50.720 won't take it. 349 00:20:52.079 --> 00:20:56.960 Yes, that's that's very true. And you know that most 350 00:20:56.960 --> 00:21:00.160 of the recreational sports books do a pretty good job 351 00:21:00.279 --> 00:21:03.799 of figuring out who's sharp and who's not and limiting 352 00:21:03.839 --> 00:21:09.359 them specifically, like Bob was talking about. But even beyond that, 353 00:21:09.440 --> 00:21:12.160 you know that they have limits that everybody has to 354 00:21:12.200 --> 00:21:15.640 adhere to. They're just not willing to take whatever you 355 00:21:15.680 --> 00:21:20.160 want to plunk down. So that is a big factor. 356 00:21:20.200 --> 00:21:22.240 And when you get to the point where you have 357 00:21:22.279 --> 00:21:26.400 a very large bank roll, then Kelly doesn't really come 358 00:21:26.440 --> 00:21:29.279 into play because you're just not able to get down 359 00:21:29.319 --> 00:21:32.759 as much as you want. But it's very interesting when 360 00:21:32.799 --> 00:21:37.319 I've watched or listened to a lot of professional sports 361 00:21:37.319 --> 00:21:40.680 betters talk about how they got their start and what 362 00:21:40.759 --> 00:21:43.359 they do now. A lot of them get their start 363 00:21:43.480 --> 00:21:48.559 by doing arbitrage betting or middling where you'll bet on 364 00:21:49.720 --> 00:21:52.880 both sides of the game at different spreads, and if 365 00:21:52.880 --> 00:21:57.039 the spread, if the game difference falls just right, you 366 00:21:57.119 --> 00:21:59.799 win both bets. But most of the time you win one, 367 00:21:59.839 --> 00:22:03.599 you lose one. That's how they got their start, and 368 00:22:03.640 --> 00:22:07.359 those are much lower risk type of plays than just 369 00:22:07.440 --> 00:22:11.640 betting on positive ev bets. And they built up their 370 00:22:11.640 --> 00:22:13.839 bank rolls that way, and then when their bank rolls 371 00:22:13.920 --> 00:22:17.000 got to be so big that they couldn't get down 372 00:22:17.039 --> 00:22:20.000 as much as they wanted to anymore, the light bulb 373 00:22:20.079 --> 00:22:22.240 went off and they said, Hey, why am I arbitrage 374 00:22:22.279 --> 00:22:25.519 betting when I've got value on one side and I'm 375 00:22:25.880 --> 00:22:27.799 losing value on the other side. Why don't I just 376 00:22:27.839 --> 00:22:30.799 bet the side that only has value. Well, that's exactly 377 00:22:30.839 --> 00:22:33.319 the point in time when you should make that switch, 378 00:22:33.759 --> 00:22:35.640 when you can't get that as much as you want 379 00:22:35.680 --> 00:22:38.119 to anymore, So you just bet the value side. You 380 00:22:38.160 --> 00:22:40.720 don't have to worry about Kelly criterion because you're never 381 00:22:40.759 --> 00:22:41.799 going to get that much down. 382 00:22:42.720 --> 00:22:44.119 Yeah. 383 00:22:44.279 --> 00:22:47.680 So arbing is a form of hedging your bets. Are 384 00:22:47.720 --> 00:22:51.759 there in the financial markets or is it right to 385 00:22:51.880 --> 00:22:52.480 headge your bets? 386 00:22:52.559 --> 00:22:56.559 Sometimes it certainly is, But it's a lot harder to do. 387 00:22:57.160 --> 00:22:59.680 You know, back in like the sixties and the seventies, 388 00:23:00.079 --> 00:23:03.720 and people like Ed Thorpe were starting with hedge funds. 389 00:23:04.519 --> 00:23:09.640 That's what they did is they would find mispriced options 390 00:23:10.519 --> 00:23:14.119 and they would load up on them, and then to 391 00:23:14.160 --> 00:23:17.799 reduce their risk, they would either buy or short sell 392 00:23:17.880 --> 00:23:22.200 the underlying stock, figuring that that was a pretty efficient market. 393 00:23:22.279 --> 00:23:25.279 They might lose a tiny little bit of value on 394 00:23:25.440 --> 00:23:27.880 the stock side, but they would make a ton of 395 00:23:27.960 --> 00:23:30.839 value on the option side, and the risk would even out. 396 00:23:32.079 --> 00:23:36.119 And that was very successful for a while until in 397 00:23:36.160 --> 00:23:39.839 the nineteen seventies the Black Shoals formula got published and 398 00:23:39.880 --> 00:23:42.799 then everybody could figure out how to value options correctly, 399 00:23:42.839 --> 00:23:45.920 and that became much harder to do. So it's actually 400 00:23:45.960 --> 00:23:51.000 a lot easier to do a true arbitrage in sports 401 00:23:51.000 --> 00:23:56.079