Is it possible to make millions using a model? Seems so!

Betting Strategy / Leighton Vaughan Williams / 01 August 2008 / 7 Comments

Today Professor Leighton Vaughan Williams turns his attentions away from politics and towards horseracing. Ever heard of Bill Benter's current performance potential model? No, well read on because he made a lot of money out of it...

Is it possible to construct a mathematical model of the performance of a golfer, a boxer, a football team, a cricket team, a snooker player, a horse, a dog, or whatever, that would predict well enough to allow us to earn a systematic profit over time?

The first problem is that any sporting event is influenced by random factors, which statisticians call 'noise.' In any given situation, this noise can overwhelm the best model to generate an unexpected outcome. That's the bad news. The good news is that these factors tend to balance out over time, so any properly devised forecasting model which takes into account those factors which are predictable has the potential to perform very well indeed. Such models are known in the trade as 'fundamental' handicapping strategies, because they are based on fundamental information about performance.

The question is whether such a system exists which can actually turn a profit, or indeed whether it has ever existed. Ask Bill Benter how he made his millions at the Hong Kong racetrack and you have your answer. Basically, he constructed a computer model designed to estimate current performance potential. This involved the investigation of variables and factors with potential predictive significance and the refining of these individually so as to maximize their predictive accuracy.

In doing so he employed state-of-the-art econometric forecasting techniques, which he was confident enough to summarize in a classic paper entitled 'Computer based horse race handicapping and wagering systems: a report.' The basic question he seeks to answer in that paper is whether it is possible to construct a forecasting model which can generate a systematic profit at the races. Ever the practitioner, he provides the answer by constricting just such a model.

His method is to identify each individual factor that could possibly predict the outcome of a race and then to whittle these down to the most reliable and effective. Once he had a model that worked on past data, he tested it 'out-of-sample; i.e. on a large sample of further races.

Sometimes he found that a variable was useful in predicting race outcomes but he really couldn't understand why that should be the case. In such circumstances, he decided the best policy was not to care. Faced with a choice between a profitable model that he couldn't fully explain, and an unprofitable model that he understood perfectly, he chose the former. Ideally, of course, you would work with a model that both works and you can fully explain, but Benter's bottom line is that if it works, it doesn't need fixing.

So what is that bottom line? Well, Bill Benter is now a very rich man even by the standards of most very rich men, and he made it on the basis of a sophisticated forecasting model which overcame track takes of about 19 per cent. In a masterly piece of understatement he concluded in his paper that "... at least at some times at some tracks, a statistically derived fundamental handicapping model can achieve a significant positive expectation." Significant indeed! Why not try it some time?

Comments (7)

1. Simon Rowlands | 02 August 2008

   Hi there Leighton.

   A fascinating subject and a most interesting article. I looked up Benter's paper on Amazon: it appears that it comes as part of a bigger publication and costs £100 (yikes!). Before proceeding could you indicate whether it would be worth the outlay for one who is primarily interested in technical analysis of horseracing? Perhaps you could indicate what other ground it covers.

   Keep up the good work!

   Simon

2. Tom Morris | 03 August 2008

   I think a footnote is needed here for Simon on this "system". Yes I believe these systems work but they include literally thousands of combinations for very "deep pocketed" investors. Simon, please read up on legal betting syndicates who operate in Hong Kong that bet on the large pools(in the $millions) for multi race bets at Sha Tin Race course.
   Oh yeah, the hardware and software for these systems cost more than mere mortals can afford and it takes a team of employees to place all the necessary combinations prior to the start of the multi race wager.
   Simon, handicapping is a dynamic collaborative endeavor between art and science. Technical factors alone are static.

3. Simon Rowlands | 04 August 2008

   Thanks Tom.

   I know quite a few people who do this sort of thing - met up with some of them again at Cheltenham, where I also met Leighton for the only time - and have even shared my thoughts with them.

   Overall, I am pretty sure it is not an approach for me, but it may still be possible to learn about my "craft" from the experiences of others.

   Basic curiosity (and, basically, I am curious about this) can take you down some pretty interesting avenues in my experience!

   Simon

4. Leighton Vaughan Williams | 05 August 2008

   Hi Simon,

   Tom's right. The cost of implementing the sort of system the big boys use is prohibitive to most. Still, the idea's interesting and may take you down some interesting paths. £100 is a little steep for the 'blue book', as I call it, but it is a bit of a classic. Cheaper to buy my book, 'Information Efficiency in Financial and Betting Markets', published by Cambridge University Press :-))

   Thanks for the kind words.

   Leighton

5. Simon Rowlands | 06 August 2008

   Hi Leighton.

   A fabulous piece of spamming with your very first post! Your book looks pretty pricey itself, but I have just ordered it and am hoping that my brief flirtation with economics at uni will help me with the non-betting content!

   Looking forward to reading other articles of yours.

   Simon
   

6. Tony Wilson | 21 October 2008

   Bill Benter started out as the betting partner of a guy I profiled, Alan Woods. They split in the late eighties, and Alan claimed when I interviewed him that Bill's 'next generation' computer model was even more successful than the one he built with Alan. That's some model if you consider that Alan's generated about US$300 million.

   Sadly, Alan died of appendix cancer at the beginning of the year. A lovely bloke. I had an amazing experience writing this story.

   http://tonywilson.com.au/writing/alanwoods.php

   
   Tony

7. tasos | 19 March 2009

   Hi Leighton

   Your book is great, especially this Johnnie Johnson paper!!

   Regards
   tasos