How/why reversion to the mean works when it comes to betting.

Whenever you bet, understanding and using this concept will make you money

None of us like losing bets.

More than that, nobody enjoys a losing run – whether that’s a few days, a week or, God forbid, a month or longer.

But it happens.

This is betting, not investing your money in a fixed-rate bank account where you get the same (small) rate of return month-on-month, year-on-year.

Betting on the horses, or football, or golf, or whatever sport you care to choose, same as stocks & shares, or crypto-currency, comes with an intrinsic, in-built, ebb-and-flow of fortune. And a commensurate rise and fall of your capital.

And that’s not a bad thing. As long as the short-term peaks and troughs are underpinned by a long-term growth of your funds.

However, if there’s a sharp drop in performance… should you be worried?

No.

And here’s why.

It’s called the “reversion to the mean”.

And what is this? Let me tell you…

“Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event.” (wolfram.com)

Or to put it another way…

Taking in the words of Dr. Paul Wendee, CEO of Paul M. Wendee & Associates – writing on forbes.com…

“In my opinion, reversion to the mean is one of the most powerful, but least understood, concepts in statistics. Regression to the mean explains that in many cases data will tend to even out – i.e. if a variable is extreme on the first observation, it will tend to be closer to the mean on the next observation. In essence, a random variable that is outside the norm will tend to converge to the norm. In his book The Success Equation, Michael J. Mauboussin explains: “Reversion to the mean says that an event that is not average will be followed by an event that is closer to the average.”

So this is a proper thing. It’s not a made-up term.

Real people apply it to real life situations.

“Reversion to the mean is the iron rule of the financial markets.”

The words of the late John C. Bogle. Oh, who was a billionaire by the way.

Vice Chairman of Berkeley Hathway, another billionaire, Charlie Munger, said –

“There is bound to be a regression to the mean”.

Similar to Robert D. Arnott, another noted financial expert…

“History teaches that when valuations are extreme, “mean reversion,” a move towards historical norms, is likely. Once value stocks turn, the recovery can be fast and intense.”

As usual, we can learn a lot from these financial trends and phenomena when we apply them to our attempt to make our sports betting pay.

So what does this actually mean?

Put simply, in terms of sport, if there is an extreme act… like a freak scoreline in football, an unknown player winning a Major golf tournament, a 100/1 rag winning the Derby…

The next time this same event takes place… the chances are the score will be less, the favourite will win the golf, and the Derby winner will be one of the fancied runners.

We don’t see strange results all the time do we?

They occur every now and again, but for the most part the expected outcome is what we see.

This is the “mean”. In other words, the norm.

Apply this to your own wagering…

Think about those last few words of Mauboussin, and I’ll paraphrase slightly… “an abnormal event is followed by a normal event”.

So when it comes to betting, an abnormal event (a losing run, or an untypically long losing run) will always be followed by a normal event (the typical profitable performance of the service/tipster in question).

In other words, after you lose…

You’ll start winning again.

Now you might well say “Well, of course Matthew, I know that!!”

Ok, well if you do, why cancel your subscription to a service based on the belief that the “guy’s lost his edge” or “the service is finished”. Just because there’s been a poor run of results, or an unusually quiet period.

This doesn’t account for the inevitable, and well-documented reversion to the mean… the winning run that is about to follow and replenish your betting bank.

Make sense?

Does to me.

What does this golden rule teach us?

Using this line of thinking, and way of managing our investments, we should be able to make our long-term investments (and betting) more profitable.

Provided for one thing…

The mean, or average, or standard, performance of the service in question is successful in the first place.

Meaning if you have a big sample set of data from a tipster or betting service – like the Golf Insider, or Irish Cash Consortium or Racing Intelligence – which shows a long-term record of success, then these fluctuations in fortune can, and will, be overcome.

Because most likely they will have already occurred before (as what source of betting wins all the time) and been subsumed into, or lost within, the overall body of results you’re looking at.

Stock markets bounce back. House prices bounce back. Good betting services, guess what, bounce back.

This is what reversion to the mean teaches us. And this is a lesson we’d all be wise to learn.

OPINION: The practice of betting doesn’t operate separate to the world of finance and capital investment. It is a sub-section of it, which shares many similar characteristics to the bigger, global activities of big business. And this is why if we, as bettors, grasp some of the key aspects of financial speculating, and apply it to our own trading, then we will be more successful. And understanding the reversion to the mean is one such lesson that we should all know, understand, and use to our own long-term benefit.

Dec-23: How/why reversion to the mean works when it comes to betting

How/why reversion to the mean works when it comes to betting.

So what does this actually mean?

Apply this to your own wagering…

What does this golden rule teach us?

Author: Matthew Walton

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