
Why I bet £900k on the Scottish referendum - jjp
http://www.bbc.co.uk/news/magazine-29314400
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foobarqux
The author focuses on why "No" would probably win but the determining factor
should have been whether his assessment of the actual odds were better than
the bookmaker's implied odds.

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skizm
The bet was close to even odds. Also since this was a one time bet, with the
downside of (probably) him never betting again, even if it payed out 10x the
money he bet, you would still want to be pretty sure you were right -- and not
just "making the right bet" since the downsides far outweigh the upsides. This
isn't "on a long enough timeline" bet, it is a "I need to be correct this
time" bet.

~~~
foobarqux
It wasn't even odds but I agree about "picking up nickels in front of
steamrollers".

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jusben1369
To all the UK HN readers here. I grew up in Australia and live in the US. When
I visit the UK I'm staggered by just how much you can bet on _everything_ As I
go home I've noticed it is more prevalent there now too then when I grew up
there. Do people in the UK discuss how mad the UK are about betting? Or do
they not think they are particularly? Is there any sort of active discussion
in terms of how healthy it is? I'm not for outlawing gambling or drinking or
prostitution but to think that there aren't a meaningful % of addicts for whom
this easy access destroys their life is also naive. Does that come into play
at all?

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rmc
As someone who has family in the UK and Australia, I'd say the gambling system
is worse in Australia (New South Wales). Pubs with wall to wall one armed
bandits (pokies). The most you'd see in a pub in the UK is one.

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tjradcliffe
But casino gambling--including slot machines--has almost nothing to do with
chance. You are as certain as can be to lose if you play long enough.

With betting on things like the Scottish referendum there is a chance for an
informed bettor to best the game, and people actually do this. There have been
cases in Canada of people making a living on sports betting, to the extent
that they got in trouble with Canada Revenue over whether their winnings were
due to "chance" or "skill" (which are taxed differently.)

Bookies cannot be experts on everything, so particularly for a one-off like
Scottish independence the odds of an informed bettor making money are not bad.

So the comparison of gambling behaviour depends very much on the kind of
gambling being done. If it is conventional casino gambling it is simply losers
paying to lose--the converse outcome is simply too low probability to be worth
mentioning (for comparison: sure... it's possible to jump out of an aircraft
without a parachute and survive, but it isn't an eventually anyone ever takes
into account when faced with the practical choice, so it isn't clear why
anyone takes into account the possibility of being a winner when faced with
the choice of casino gambling.)

In sports betting and betting on odd-ball events, on the other hand, it is at
least theoretically possible for a well-informed bettor to win (but
realistically: you are probably not that bettor, so it pays to be very
cautious and never, ever bet more than you can afford to lose, because you
will sometimes lose.)

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dragonwriter
> But casino gambling--including slot machines--has almost nothing to do with
> chance.

Yes, it does.

> You are as certain as can be to lose if you play long enough.

That doesn't mean that the individual instances of gambling have nothing to do
with chance -- its a product of the aggregation of the effects of chance.
Given an infinite number of iterations of any random gambling scenario, you
are eventually going to hit a losing streak sufficient to consume your entire
bankroll (the size of the bankroll relative to the stake in any given
iteration affects how many iterations it takes before you are more likely than
not to have hit this point, but that's about it.)

But the existence of this effect (Gambler's Ruin) doesn't mean that the type
of gambling has nothing to do with chance -- indeed, it only applies _because_
gambling is about chance.

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bryanlarsen
Do any businesses regularly use betting markets such as this for hedging? If
so, that could have certainly moved the odds to give great odds to a "no" bet.

Some businesses could have been severely negatively impacted by a yes vote, so
they can hedge against that risk by betting on 'yes'. Is that sort of thing
done? Is it legal? Or do they just use different markets for this sort of
thing? Buying or selling futures contracts on the pound could be highly
correlated with the vote outcome.

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TheBiv
As he alluded to in the article, the bookies were not prepared for the large
sum of money that he wanted to wager - in total. These sort of prop bets
typically don't allow for such a larger amount to be wagered.

~~~
at-fates-hands
Not sure if he knew or not, but with so much juice on a "no" vote, he would've
single handily moved the numbers too much in his favor.

The art of being a good bookie is making sure you have action on both sides of
a bet - that way you never lose. By taking that much heat on an obscure bet
would cause a lot of people to either move all of their money to one side, or
everybody would be spooked and cancel all their bets.

If the bookie were to take that bet like he wanted to, it would have put him
out of business either way.

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Someone1234
So just to be clear, if he wins he makes 22.22~% profit (200K), if he loses
then he's out 900K (100% loss). While that is a great ROV (relative to both
interest and or the stock market), it does seem like the stake was too high
relative to the reward.

Could they not have taken that money, purchased a couple of homes (e.g. 2x
275k), renovated them up to modern standards (e.g. 2x 60-85K), and then resold
them? A lot of people do that and it has a very high ROV also (as people get
into bidding wars more easily on "ready to move into" property Vs. ones in
need of renovation).

Plus with the property thing you always ultimately have the property/land
which can be sold. So the risk isn't really 100% of the properties' value, it
is at most the difference between purchase price and raw land value. Even in
the 2008 recession a lot of people in the property game did "alright."

~~~
Tycho
You could definitively answer how much he should have bet using what's known
as the 'Kelly criterion.' Basically you need to consider the total wealth of
the individual and the edge they believe they have (ie. bookies offer odds at
4/1 while the gambler reckons it's longer).

[http://en.wikipedia.org/wiki/Kelly_criterion](http://en.wikipedia.org/wiki/Kelly_criterion)

Whether this was a rational bet depends on how good he thought is edge was
(perhaps allowing for some margin of error) and how rich he already is.

~~~
eru
The Kelly criterion applies for repeated bets. It optimizes the logarithmic
expected winnings. I am not sure how it applies for a single bet. I guess it
depends on one's like or dislike of risk.

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Tycho
I was wondering about that but I don't see how it wouldn't apply. In a series
of bets it guarantees you wont go bust and will maximise your long term
winnings (I'm probably missing some subtleties here so corrections welcome).
But the whole concept can be traced back to a letter/essay by one of the
Bernoulli family, in which the example was a one off bet.

One other thing: it has always bothered me that people should have a 'like or
dislike of risk.' Something about the concept doesn't sit right with me,
unless we're talking about having an adrenaline rush. That's why I liked the
Kelly criterion - it takes all notion of personal preference out of the
picture and gives you a universal formula.

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thanatropism
It's not that there's a like or dislike of risk.

Preference orderings are either (locally) convex or concave. Risk aversion is
just that, a preference ordering over mean/variance bundles.

There was an econ textbook that gave a memorable example of a (qualified)
exception to convexity: ice-cream and olives. Usually I'll want to have ice
cream and olives in my fridge, but I don't want them at once! - so pure ice-
cream would be prefered to a mix of them at my plate, right now.

Risk aversion does not imply, on its own, that you don't want risk at all. It
implies that you want some mix of risky and non-risky assets; while concavity
towards risk would imply you want either one or the other.

The problem with making risk aversion/convexity work with lotteries and such
is that the price you're supposed to pay for lotteries is off your utility
surface. But: since lottery tickets and small bets are relatively small in the
context of your budget, one can figure that the mispricing in your overall
mean/variance bundle is small, and that the emotion of betting may be the case
of not wanting to optimize for a grey wall, an optimal mixture.

Finally, re: universal formulae, I think you'd profit from reading Elie
Ayache's _The Blank Swan_.

~~~
Tycho
But... why should anyone have a different 'preference' from another person?

Thanks for the book recommendation.

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Tycho
I would like to know how much Deutsche Bank had bet on the referendum, or
rather on Sterling. They released a research report saying the case for No was
overwhelming, a week before the vote. Sterling had just been rocked by the one
poll that put Yes ahead (after a series of tightening polls). Implied
volatility jumped up. Had they neglected to hedge their currency exposure?

~~~
atmosx
NOTE: the difference was ~5% which means that once again financial crooks
don't know nothing about the subject at hand.

Why should they? In case they lose the bet, German taxpayer will pay. Business
as usual.

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icebraining
Uh, no, the difference was actually higher than 10%.

[http://en.wikipedia.org/wiki/Scottish_independence_referendu...](http://en.wikipedia.org/wiki/Scottish_independence_referendum,_2014#Totals)

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yeldarb
Where would one even go to place such a bet?

Also, how can you assess the counter-party risk here? You're letting someone
hold the equivalent of $1.4MM for some number of weeks/months; there has to be
some risk that they will default on what is effectively a loan. Can you
purchase an insurance policy on something like this?

~~~
notahacker
In this case they went to William Hill, an 80 year-old publicly listed and
regulated company that made >£200M in profit off £1.5bn revenue last year.

The counterparty risk was negligible, especially compared with the rather high
risk the pollsters all made systematic errors in their surveys (it's not
particularly difficult to imagine a scenario in which people with a stated
intention to vote _for_ independence turned out to be _much_ more likely to
actually bother to vote; actually the main reason why I didn't try the lower
risk, lower return version of this bet and place all my liquid funds in a
FTSE100 index fund or ETF the day before)

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goodcanadian
Well, I certainly don't have that much money to bet, but I wasn't surprised by
the results. Just because a couple of late polls suggested that "Yes" was
ahead doesn't mean much when the bulk of the polls still showed "No" in the
lead. You have to understand that the polls only sample a (relatively) small
number of people and therefore, when taken individually, have large margins of
error that are sadly rarely reported. You have to consider all of the polls
together as a set.

~~~
mdda
If I were the UK government, I would have paid for a last minute "YES" poll :
Just to jolt the NO voters into going to vote (because otherwise, they may
have not bothered, seeing that the polls were all pointing their way anyway).

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swang
Some math on this assuming the article is correct. He was offered 5:4 odds so
the juice was 2.8% given what he should've won vs what he got. The 5:4 odds
mean he had to be at least 44% (+2.8%) confident just to break even, moreso to
make a profit.

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JonnieCache
Make sure to listen to the audio clip, the button kinda blends in. They
discusses some things which aren't in the text.

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jedc
Weird, William Hill's corporate cheques are drawn from the very same bank
branch where I have my account.

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otoburb
I don't mean to be pedantic, but it should be the "Scottish" referendum, and
not "Scotish". If an admin could add the second "t" it would be greatly
appreciated, at least to match the BBC article's title.

~~~
dang
Ack! How did we miss that? Thanks!

