Friday, 29 April 2016
Thursday, 28 April 2016
Heuristics and Cognitive Bias: the Reason Most Fail at Betfair Trading
When I went for an interview at an investment bank for a place on its trading programme I was subjected to a two day assessment centre where I went through a number of psychological and psychometric tests. I obviously did ok as I was later offered a job and a place on the programme.
I did not realise it at the time but the bank was screening for individuals whose mental processes involved the fewest mental shortcuts “heuristics” and cognitive bias.
I suspect many readers will switch off at this point (if they’ve got this far!) thinking “what a load of rubbish I just want to make a few quid on Betfair!” If they are one of the lucky few who are not affected by heuristics or cognitive bias then good luck to them. However the studies show that such people are in the minority to such an extent that 1.01 would offer value on them being affected.
If you have stuck with me…
Heuristics
Psychology splits the making of predictions into two parts: intuitive and quantitative. Intuitive predictions are made by a person running through possible outcomes, relying on personal knowledge, experience and common sense. Quantitative predictions on the other hand are made using only objective data and the data’s relationship to the outcome. With quantitative predictions there is little, if any, subjective (or “thinking”) component.
Why is this important? Numerous studies have shown that simple quantitative models outperform not only the average person but individuals that are supposedly experts in their fields. For example:
Lewis Goldberg showed that experienced clinical psychologists failed by some margin to beat a simple model in diagnosing patients.
Andrew martin and Kevin Quinn showed that a simple model was more successful in predicting the outcome of cases in the Supreme Court in the US than legal experts.
The studies conclude that the models beat humans because they reliably and consistently apply the same criteria over and over. It is this complete reliability in the application of the models that generates the better results. Models, after all, are never influenced by emotions. Humans, on the other hand, are quite the opposite. Not only are we emotional creatures are brains have evolved to be used to a life in the wild where instant decisions could mean the difference between living and dieing. Evolution resulted in us developing mental shortcuts – heuristics – that enable us to identify a danger and react before we are conscious of what that danger is. But take as an example the situation when you jump thinking that you have seen a spider, snake or whatever but shortly afterwards notice that the spider is a piece of fluff, the snake is a stick, etc. Here you have been the victim of the heuristic to avoid spider-like or snake-like objects.
Heuristics are clearly useful for survival but lead to cognitive bias that make it difficult for us to make logical decisions. These include:
Overconfidence – regarding our own judgement as better than it is.
Self-attribution bias – ascribing successes to ourselves but blaming others for failures.
Hindsight bias – believing after an event occurs that we had predicted it in advance.
Availability bias – placing more weight on information that is recent or easily brought to mind.
So how do you overcome this hardwiring that mother nature has imposed on aspiring sports traders? More on that in another post…
I did not realise it at the time but the bank was screening for individuals whose mental processes involved the fewest mental shortcuts “heuristics” and cognitive bias.
I suspect many readers will switch off at this point (if they’ve got this far!) thinking “what a load of rubbish I just want to make a few quid on Betfair!” If they are one of the lucky few who are not affected by heuristics or cognitive bias then good luck to them. However the studies show that such people are in the minority to such an extent that 1.01 would offer value on them being affected.
If you have stuck with me…
Heuristics
Psychology splits the making of predictions into two parts: intuitive and quantitative. Intuitive predictions are made by a person running through possible outcomes, relying on personal knowledge, experience and common sense. Quantitative predictions on the other hand are made using only objective data and the data’s relationship to the outcome. With quantitative predictions there is little, if any, subjective (or “thinking”) component.
Why is this important? Numerous studies have shown that simple quantitative models outperform not only the average person but individuals that are supposedly experts in their fields. For example:
Lewis Goldberg showed that experienced clinical psychologists failed by some margin to beat a simple model in diagnosing patients.
Andrew martin and Kevin Quinn showed that a simple model was more successful in predicting the outcome of cases in the Supreme Court in the US than legal experts.
The studies conclude that the models beat humans because they reliably and consistently apply the same criteria over and over. It is this complete reliability in the application of the models that generates the better results. Models, after all, are never influenced by emotions. Humans, on the other hand, are quite the opposite. Not only are we emotional creatures are brains have evolved to be used to a life in the wild where instant decisions could mean the difference between living and dieing. Evolution resulted in us developing mental shortcuts – heuristics – that enable us to identify a danger and react before we are conscious of what that danger is. But take as an example the situation when you jump thinking that you have seen a spider, snake or whatever but shortly afterwards notice that the spider is a piece of fluff, the snake is a stick, etc. Here you have been the victim of the heuristic to avoid spider-like or snake-like objects.
Heuristics are clearly useful for survival but lead to cognitive bias that make it difficult for us to make logical decisions. These include:
Overconfidence – regarding our own judgement as better than it is.
Self-attribution bias – ascribing successes to ourselves but blaming others for failures.
Hindsight bias – believing after an event occurs that we had predicted it in advance.
Availability bias – placing more weight on information that is recent or easily brought to mind.
So how do you overcome this hardwiring that mother nature has imposed on aspiring sports traders? More on that in another post…
Friday, 15 April 2016
IPL – Gujarat Lions v Pune Superkings
The Indian Premier League, love it or hate it, is back in full swing. I love it and not just for the trading opportunities it presents. It has to go some to live up to the World T20 but I am sure it will have a good crack.
I didn’t do much in this game. Pune won the toss and elected to bat. There have been a few decent scores at Rajkot and with the likes of Ajinkya Rahane, Faf Du Plessis, Kevin Pietersen, Steve Smith, Mitchell Marsh and MS Dhoni in the side I was expecting a decent total so was with Pune from the start. I was pretty happy with Faf and KP going along nicely but things when wrong from there. I bailed for a small profit and watched as Pune made a mess of the second 10 overs. Had it not been for 20 off the last over their total would have been poor. The Manhattan chart and the Betfair graph of the Lions at the break illustrate things nicely:
I couldn’t trade the second innings so left things there. Hope you were able to get something out of the game.
Thursday, 14 April 2016
Hello... again
Two and a half years and no posts… What happened? Good question.
I often wondered why well written blogs abruptly came to a halt. The authors clearly knew a lot about their subjects and posted some useful content but then they went quiet. Whether I have posted useful content or not I don’t know – I only made a few posts so the odds may be against it! – but I certainly went quiet. The truth is that after acknowledging at the outset that the blog may “die on its arse” I then developed some grand ideas whereas I should have probably approached things with a more gradual plan.
One reason I am a full time trader is freedom. Freedom from the 9-(if you’re lucky!)5 drudgery, freedom from the rat race, freedom from clueless bosses who have got where they are because they can talk the talk rather than walk the walk, freedom from the risk of being laid off, freedom from pointless meetings… You get the picture. I get to choose what I do, when I do it and where I do it from (I am writing this on the terrace of a chalet in the Alps) With my grandiose plans I found that it changed from an enjoyable pastime where I could share some knowledge and hopefully help aspiring traders to something I felt I had to do. It became a chore.
So I stopped. Why am I starting again? The truth is I like helping people, giving something back. When I began cricket trading there was very little out there to help people starting out. There is a lot more these days but much of it is of questionable quality. I won’t be able to tell you how to make “£10,000 per day working from home for 3 hours for the ‘one-time only’ discounted price of £29.99 along with several free gifts with a value of £769”! Perhaps there isn’t anyone who can…
What I can do is, hopefully, point you in the right direction and get you started on a profitable trading journey. I am not going to make any commitments as to posting frequency and I may just throw up a few screenshots now and again to show what is possible. I know that “P&L blogs” are a controversial subject and I agree that on their own screenshots of big green numbers do not give much to the reader but I personally find that they are interesting when coupled with other content.
Let’s see how we go.
Wednesday, 16 October 2013
India v Australia - Second ODI
Another great game between these two. Aus won the toss and decided to bat. The market was pricing in 275 runs but with some very good batting from Aus and some awful bowling from India, Aus made a massive 359. I got involved in the first innings, which is a rarity for me, in the low 1.2x range. Aus were smashing it about and the market did not seem to want to allow Aus to go below 1.20. It looked a good spot with limited downside or a “free lay” as those on the Betfair forum like to call it. And so it proved.
As well as the limited downside I took the position in the knowledge that the market was still favouring India, not necessarily from a value point of view but from the fact that it was exaggerating price moves in India’s favour. When these situations combine you have a great spot to open a trade. They do not always work out as well as this one did but you can usually at least cover your liabilities.
I was able to take my liability out early in India’s innings and gradually balanced my book as the market moved to evens the pair.
The key in these situations is to leverage your profits as much as possible. Many of you will have heard the phrase “cut your losses and let your profits run”. This can be interpreted in many ways but to me it simply means frame your downside and only take profit when the market offers value. By getting value on opening a trade and getting value on closing you will be well ahead in the long run. It is true that there will be games where no value is available to take profit and in these situations I do not take profit. This can make for a bumpy ride in the short term but this is a long term game.
If you got involved I hope you did ok.
As well as the limited downside I took the position in the knowledge that the market was still favouring India, not necessarily from a value point of view but from the fact that it was exaggerating price moves in India’s favour. When these situations combine you have a great spot to open a trade. They do not always work out as well as this one did but you can usually at least cover your liabilities.
I was able to take my liability out early in India’s innings and gradually balanced my book as the market moved to evens the pair.
The key in these situations is to leverage your profits as much as possible. Many of you will have heard the phrase “cut your losses and let your profits run”. This can be interpreted in many ways but to me it simply means frame your downside and only take profit when the market offers value. By getting value on opening a trade and getting value on closing you will be well ahead in the long run. It is true that there will be games where no value is available to take profit and in these situations I do not take profit. This can make for a bumpy ride in the short term but this is a long term game.
If you got involved I hope you did ok.
Monday, 14 October 2013
India v Australia – First ODI
I was too late to take a screenshot of the market but there is not much to report from a trading point of view.
The Aussies batted first and posted a good total of 304 with Bailey and Finch producing good knocks. As is often (always!) the case with games involving India – and thanks to Bossman for pointing this out in his comment – the market rarely gave Aus the credit they deserved. Anyone would think that betting was legal in India!
India started off slowly trying to see off the most dangerous of the Aus bowlers and really never got into the chase. The run rate kept climbing and was in the 9s when Dhoni and Jadeja came together. The market was in the mid-1.1x range at the time and knowing the market love for India it was not going to take much to be able to cover liability and hope Dhoni could perform his magic.
I was able to take my liability out but good bowling from Faulkner in particular meant that India could not make use of the batting power play – how often does that happen?! – and that was pretty much that. I ended up with decent green on India and no loss on Aus. Shame there was no chance to start balancing my book.
Incidentally, if you do not follow Bossman’s blog you should do. He provides in running commentary on most games and it is well worth a look. You can find his link on the right.
The Aussies batted first and posted a good total of 304 with Bailey and Finch producing good knocks. As is often (always!) the case with games involving India – and thanks to Bossman for pointing this out in his comment – the market rarely gave Aus the credit they deserved. Anyone would think that betting was legal in India!
India started off slowly trying to see off the most dangerous of the Aus bowlers and really never got into the chase. The run rate kept climbing and was in the 9s when Dhoni and Jadeja came together. The market was in the mid-1.1x range at the time and knowing the market love for India it was not going to take much to be able to cover liability and hope Dhoni could perform his magic.
I was able to take my liability out but good bowling from Faulkner in particular meant that India could not make use of the batting power play – how often does that happen?! – and that was pretty much that. I ended up with decent green on India and no loss on Aus. Shame there was no chance to start balancing my book.
Incidentally, if you do not follow Bossman’s blog you should do. He provides in running commentary on most games and it is well worth a look. You can find his link on the right.
Friday, 11 October 2013
India v Australia - T20
Great game yesterday. There was no opportunity for me to get involved so in the end I just sat back and watched the exciting finish.
One interesting thing to come out of the game from a trading point of view was the market’s reaction to Australia’s innings. The graph below, taken during change of innings, illustrates the point.
Many of you will be familiar with support and resistance levels and this graph shows how the market would not let Aus’s price go much below 1.5. In fact the price bounced 7 times of this resistance point! This is a common occurrence and something new traders should look out for.
Over the years I have developed a model of prices for T20s. Whilst there are more variables in the second innings, first innings prices are reasonably straight forward to model using the market’s expectancy of runs. This model is useful to identify resistance points and often you can lay the batting side after a good start for little risk.
I will talk more about modelling and support and resistance points in later posts.
One interesting thing to come out of the game from a trading point of view was the market’s reaction to Australia’s innings. The graph below, taken during change of innings, illustrates the point.
Many of you will be familiar with support and resistance levels and this graph shows how the market would not let Aus’s price go much below 1.5. In fact the price bounced 7 times of this resistance point! This is a common occurrence and something new traders should look out for.
Over the years I have developed a model of prices for T20s. Whilst there are more variables in the second innings, first innings prices are reasonably straight forward to model using the market’s expectancy of runs. This model is useful to identify resistance points and often you can lay the batting side after a good start for little risk.
I will talk more about modelling and support and resistance points in later posts.
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