How to Think Like a Professional Risk TakerMay 15th, 2021 - Ryan
Cracked my eyes open to some interesting news yesterday morning! KYH will no longer be able to access the odds from the ZED API, and within 4-6 weeks even the discord will lose access to these values. I’ve long inferred that the “odds” were the most accurate depiction of a fitness score we had, which I discuss my first blog post An Introduction to Genetic Algorithms and ZED. In theory, separating any info that could lead to “cracking” the genetic algorithm details from public facing odds of any given race is a huge plus for the staying power of the ecosystem. But thousands of players are now wondering, “how am I supposed to know if my horse is good or not?”. If we eventually have to rely solely on historical racing performance to evaluate our horses, won’t we have to put a bunch of money up to see if they are any good? The short answer is yes. The long answer is that this will increase the skill gap and give knowledgeable players, and those willing to truly understand the game a significant advantage. We now need to think about racing any new horse as an unknown, and build out our strategy to know our horse. We can’t just rely on that first griffin race to give us that much needed insight. No more shortcuts, it’s time to get to work!
Any time there is real money on the line, it is vitally important that you learn to think in terms of risk versus reward. As a professional day trader, before any trade I must ask myself: “What am I willing to lose on this trade, and how much will I make if I am right?”. The ratio between those two numbers is key to long term profitability, while also being a direct function of your win rate. But we will get there. First, let’s explore the concept of Edge.
When you enter a casino and sit down at your first game of chance, be it roulette, blackjack, or the slot machine, you instantly become a slave to long term odds, perhaps without even realizing. Casinos design the rules of the game to give themselves a statistical advantage over hundreds of thousands, if not more, unique hands or spins. While individual participants can experience strings of wins and losses, when you sum every player together and let the odds of the game play out, the casino will always make money long term. That’s the business model. It’s called the Law of Large Numbers. The parameters of the game ensure that the more and more trials that take place, the closer the results get to the Expected Value.
So how does this apply to ZED? The initial decisions you make when racing your horse come down to strategy and selectivity. You see the odds from your griffin immediately, and then make the decision to race within your designated class. After 10-20 initial entries, it should start to become clear which distance your horse prefers, and you should get some initial data on your horse's win/place/show rate. Those percentages, your ability to play your own odds to your advantage and being smart with the value of the entries you participate in control your long term expectancy. In short, YOU have the power to be your own casino. Expectancy is a calculation that determines how much money you should expect to make on every dollar you invest in racing based on historical performance.
It is calculated as follows:
E = Expectancy W = Average size of win L = Average cost of entry P = Probability of winning
While some may be questioning why we use the show % in this calculation, I will explain. The expectancy calculation depends on the probability that you will PROFIT on any given race entry. The average size of win will greatly increase if your horses often place first, and that will normalize the overall calculation to give you a more positive expectancy. Further, this calculation continues to normalize regardless of size of entry. Whether you enter in $2.50 dollar races or $100 dollar races, the expectancy calculation still holds true. To repeat, it is a method of finding your expected return on every $1 you invest.
So for an example:
W = (Sum of all winnings - sum of all entry costs) / (# of shows) L = (Sum of all entry costs - sum of all winnings) / (# of losers) P = Show percentage
W = (3.9405) / (491) = 0.008 L = (8.7038 - 3.9405) / (856.0) = 0.0056 P = 0.3645 E = ([1 + (0.008 / 0.0056)] * 0.3645) - 1 E = -0.1148
Wow. So going off of historical values, we should expect to profit -0.1148 ETH for every 1 ETH we put up in racing fees. But there is a very important thing to remember here. We did not keep entries consistent, we did not keep class consistent, and we surely did not keep distance consistent.
The KEY to understanding expectancy, and further, recreating past results is understanding how you got to the final value. There is an incredible amount of power and potential behind a horse that has a -0.1 expectancy and strictly races Class III, $15 dollar entries, 1600m. Whereas a horse that races every class, varying distances, varying entry sizes will be very hard to calculate future expected value. The stable owner cannot simply say “Okay I have a positive expectancy and ROI going, let’s power into a bunch of $100 dollar entries!”. The calculations they have produced and the historical results may be a sum of multiple environments that do not relate appropriately.
Understanding expectancy as a concept, and how to calculate it for your horse (don’t worry, we will just do it for you - coming soon!), is vital when determining how to tier up your horse, or to size down your entries. Those who are capable of allocating their racing capital correctly will dominate the future of ZED. Thousands of horses may be out there whose owners simply do not understand the most effective way to utilize their tool! Lucky for all of you who have so graciously taken the time to read my math, we will soon follow this with Part 2: How to Race like a Professional Risk Taker. We look forward to bringing this information to you, and happy racing. Don’t forget; you may know yourself, you may know the game, but you have to Know Your Horses. Cheers.