There probably is not a day that goes by on internet handicapping forums in which you see bright minds and recreational bettors alike claiming being on “hot streaks” and thinking that they hold substance. Yes, handicappers are humans, much like the players we try to handicap, thus making us subject to variables that affect the quality of our handicapping in the short term. However, that being said, digging deeper into the mathematical aspects of what’s truly behind a hot streak, and one will realize these short term returns that are above our historical means are rather a product of randomness, noise, and good fortunes.
In this example, I would like to use a handicapper that possesses “sharp” like tendencies, as “hot streaks” hold even less substance for the recreational bettors that do not possess an accurate quantitative valuation model to go by. Sharp bettors realize that in reality, they are not betting on teams, rather prices. Therefore, they derive (via power ratings) a valuation model that quantifies their worth of a particular team, and finds disparities between their price and the market price. A positve EV handicapper’s model will find that the results from disparities between “intrinsic” and market prices will lie closer to the perceived value. Therefore, each bet they make will have an “expected positive ROI”, and the more accurate their valuation model is, the closer the actual ROI is to the “expected” ROI in the long run.
For example (simple example). Suppose that there is a quality valuation model that finds 500 games in which derives an intrinsic value of -120 when the market price is -100. If the valuation model generated substance, the results would have produced 273 winners and 227 losers, converting an ROI of 9.2%. Supposing that the handicapper and his (her) model holds long term substance and positive EV, we can diagnose what is truly behind a short term hot streak. Suppose this handicapper goes on a two week hot streak in which he goes on a 30 and 10 run. Is this handicapper hot? Being that his short term ROI of 75% is much larger than his expected 9.2%, he must be “hot” and seeing the sport much easier, right? He must be a good handicapper to follow, at least until his hot streak subsides. Absolutely not. If his valuation model is still generating expected ROI’s of 9%, his excess return is merely noise, or else, it simply defies his models accuracy. The longer his hot streak lasts and the longer his excess ROI is above his expected ROI, the more concerns he should have to the accuracy of his model.
Yes, handicappers are human and the quality of our handicapping changes in the short term. What does this mean exactly? All it means is that if the quality of our handicapping improves in the short term, then the accuracy of the intrinsic value of our lines will improve- not the expected short term returns, as that is a product of other variables as well(the short term market pricing efficiency by linesmakers and simple randomness). So even if the human variables behind our handicapping has a short term structural change effect on the quality of handicapping, the results will more than likely produce a decrease in the standard deviations of our returns due to an increase in model accuracy, not necessarily improved short term results. Simply put, the only reason for an increase in short term returns holding substance for a handicapper is a product of a decrease in market effeciency. What does this mean? This means that the only short term increase in a handicappers ROI that holds substance is a product of an increase of expected ROI due to an increase in the disparity between the intrinsic value and market price.
So yes, hot streaks are nice to have once in a while, as it does improve the size of our bankroll. But the longer they last, the more concerning they should be for an astute handicapper, as a short term ROI of 20% derived from a valuation model that produced an expected ROI of 10% makes the short term accuracy of the model worth as much as if it produced a 0% ROI. So next time you see a handicapper or a tout claiming his hot streak should be followed, please think twice.
In this example, I would like to use a handicapper that possesses “sharp” like tendencies, as “hot streaks” hold even less substance for the recreational bettors that do not possess an accurate quantitative valuation model to go by. Sharp bettors realize that in reality, they are not betting on teams, rather prices. Therefore, they derive (via power ratings) a valuation model that quantifies their worth of a particular team, and finds disparities between their price and the market price. A positve EV handicapper’s model will find that the results from disparities between “intrinsic” and market prices will lie closer to the perceived value. Therefore, each bet they make will have an “expected positive ROI”, and the more accurate their valuation model is, the closer the actual ROI is to the “expected” ROI in the long run.
For example (simple example). Suppose that there is a quality valuation model that finds 500 games in which derives an intrinsic value of -120 when the market price is -100. If the valuation model generated substance, the results would have produced 273 winners and 227 losers, converting an ROI of 9.2%. Supposing that the handicapper and his (her) model holds long term substance and positive EV, we can diagnose what is truly behind a short term hot streak. Suppose this handicapper goes on a two week hot streak in which he goes on a 30 and 10 run. Is this handicapper hot? Being that his short term ROI of 75% is much larger than his expected 9.2%, he must be “hot” and seeing the sport much easier, right? He must be a good handicapper to follow, at least until his hot streak subsides. Absolutely not. If his valuation model is still generating expected ROI’s of 9%, his excess return is merely noise, or else, it simply defies his models accuracy. The longer his hot streak lasts and the longer his excess ROI is above his expected ROI, the more concerns he should have to the accuracy of his model.
Yes, handicappers are human and the quality of our handicapping changes in the short term. What does this mean exactly? All it means is that if the quality of our handicapping improves in the short term, then the accuracy of the intrinsic value of our lines will improve- not the expected short term returns, as that is a product of other variables as well(the short term market pricing efficiency by linesmakers and simple randomness). So even if the human variables behind our handicapping has a short term structural change effect on the quality of handicapping, the results will more than likely produce a decrease in the standard deviations of our returns due to an increase in model accuracy, not necessarily improved short term results. Simply put, the only reason for an increase in short term returns holding substance for a handicapper is a product of a decrease in market effeciency. What does this mean? This means that the only short term increase in a handicappers ROI that holds substance is a product of an increase of expected ROI due to an increase in the disparity between the intrinsic value and market price.
So yes, hot streaks are nice to have once in a while, as it does improve the size of our bankroll. But the longer they last, the more concerning they should be for an astute handicapper, as a short term ROI of 20% derived from a valuation model that produced an expected ROI of 10% makes the short term accuracy of the model worth as much as if it produced a 0% ROI. So next time you see a handicapper or a tout claiming his hot streak should be followed, please think twice.