Bankroll Management

Last year, in a question-and-answer session about sports betting, I was asked to quantify the reasons that a “typical” sports bettor is usually unsuccessful betting on sports. In the previous issue of FIGHT!, I talked about two topics I said were the most important to becoming a winning sports bettor: line shopping and beating closing lines. But my answer to why a typical sports bettor usually ends up losing his stake mentioned neither of those very powerful tools. It brought up another concept entirely: bankroll management.

Bankroll management is the concept of managing the size and frequency of your bets to avoid something called “gambler’s ruin,” also known as “risk of ruin.” To understand gambler’s ruin, we’ve got to talk a little about a few concepts from statistics. But don’t worry if it’s been too long since Stats 101 – this is actually very easy to understand.

Gambler’s ruin is simple. It refers to a gambler losing enough of his money so that the gambler can no longer continue gambling. Bankroll management is simply techniques for managing a gambler’s funds to stave off the risk of gambler’s ruin.

The real force behind gambler’s ruin is the statistical concept called “standard deviation.” Officially, standard deviation is defined as the measure of the spread of values in a probability distribution. In plain English, standard deviation is what causes both winning streaks and losing streaks. It’s the understanding that no matter the probability for an event to occur, an individual occurrence of that event – or a short-term series of those events – will not fall exactly as expected. Simply put, there will be some variance in what really happens from what we expect to happen.

Consider flipping a coin. Everyone knows that a fair coin has a 50/50 chance of landing on heads. When you flip a coin once, you know that it’s not going to come up as 50% heads and 50% tails on that one flip. There are only two choices, and the coin is going to come out either heads or tails. So one flip of a coin has a very high standard deviation from the expected results. Either the coin is going to land on heads on that flip or land on tails. It’s either 100% heads or 100% tails.

For two flips, the standard deviation is still very high. In fact, in flipping a coin twice there’s still a 50% chance that it will come up the same on both flips – either heads and heads, or tails and tails. There’s only a 50% chance that in two flips the coin will end up exactly as we’d expect it would – with one heads and one tails.

If you flip that same coin 100 times, the results of the flips will move closer to the 50/50 distribution of probability. If you flip the coin 10,000 times, you’ll see results significantly closer to 5,000 heads and 5,000 tails. It’s not very likely that you’ll land exactly on that distribution but the percentage difference from the results being 50% heads and 50% tails will decrease over a larger number of flips. This decrease is a decrease in the standard deviation, or a decrease in the variance of the outcome due to the larger number of events.

In terms of mixed martial arts betting, many expert handicappers consider the Matt Serra win over Georges St. Pierre at UFC 69 the ultimate expression of variance. Linemakers had Serra as a very heavy underdog, yet many expert bettors felt that St. Pierre should still win the fight with a high enough probability to make him a good bet as a heavy favorite. We all know how that turned out: Serra walked away with St. Pierre’s title, and many bettors – myself included – lost money.

Assuming that you are a winning gambler, variance and standard deviation in gambling terms means that while you may be able to beat the odds offered by the bookmakers in the long run, you need to be able to weather the storms of short-term variance such as the occasional unpredicted upset. Risk of ruin is really just the risk that the standard deviation will rear its ugly head and wipe out your bankroll, regardless of if you’re a winning bettor in the long term.

Remember that in sports betting we’re talking about small percentage edges on a typical bet. So our standard deviation in sports betting can be very, very high in the short term, just like the earlier example of flipping a coin.

This occurs in other sports as well. Betting on NFL sides (which team will win) against the point spread, the successful sports bettor expects an edge of no more than 55%. As with the example of a coin flip, the variance on picking winners will be very high, even if you have the 55% edge on the 50% occurrence of the team covering the spread or not.

To protect against gambler’s ruin, there are many tools for bankroll management, and we’ll explore some advanced bankroll management topics in the near future. But there is one point that is vastly more important than the rest and almost universally overlooked by the casual bettor: The single most important way to avoid gambler’s ruin is that you should have an adequately sized bankroll for the bets you are making. For most people, that means sizing your bets according to your gambling bankroll, and not vice-versa.

Assume you have a $100 bankroll to bet on the coin tosses we previously discussed. While probability might dictate that you have a high likelihood of being about even after 10,000 flips, if you don’t adequately size your bets, you’re not likely to survive the short term, where the high standard deviation has a real chance of destroying your bankroll. As an extreme example, if you bet all of your bankroll on every toss, odds are that you’re going broke long before we get to 10 throws, let alone 10,000. To get there, you need to size your bets adequately to appropriately minimize your risk of gambler’s ruin.

For events where the outcome is close to 50-50, such as an MMA fighter listed at odds of -110, the rule of thumb is to place bets sized at 1% to 2% of your total gambling bankroll. This would mean if you had a $1,000 bankroll, you should bet no more than $10 or $20 on a single fight if you want to avoid the likelihood of being unable to gamble any more. With the moneyline betting format of mixed martial arts events, it’s acceptable for bets on larger favorites to exceed that 2% guideline, but the bets should still be adequately sized according to your bankroll. The 1% – 2% may not be the same firm guideline in regards to betting on MMA, but the concept is still the same. You need to give yourself room to overcome variance.

Most people just getting started on betting on sports will open a sports betting account and proceed to put the vast majority of their bankroll into play right away. Using the $1,000 bankroll above, someone practicing poor bankroll management tie up $900 in a single night of fights. Doing so has a tremendously high risk of ruin, and betting too big for their bankroll is ultimately why most casual gamblers end up losing it all.

People practicing poor bankroll management may win money in the short term. But the standard deviation in gambling is higher than most realize, and soon variance results in even the winning bettor who practices poor bankroll management going “busto.”

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