The Perfect Bet

by Adam Kucharski

  106Statistician James Albert has attempted: Albert, James. “Pitching Statistics, Talent and Luck, and the Best Strikeout Seasons of All-Time.” Journal of Quantitative Analysis in Sports 2, no. 1 (2011).

  106researchers at Smartodds and the University of Salford: McHale and Szczepański, “Mixed Effects Model.”

  107Erroneous odds are less common: Author interview with David Hastie, March 2013.

  107“I would start with the minor sports”: Predictive Sports Betting, MIT Sloan Sports Analytics Conference.

  CHAPTER 5

  109“What hath God wrought!”: History of the telegram comes from: “The Birth of Electrical Communications—1837.” University of Salford. http://www.cntr.salford.ac.uk/comms/ebirth.php.

  110traders used telegrams to tell each other: Poitras, Geoffrey. “Arbitrage: Historical Perspectives.” Encyclopedia of Quantitative Finance, 2010. doi:10.1002/9780470061602.eqf01010.

  110traders refer to the GBP/USD exchange rate: Author experience.

  110Some would even trek further afield: Poitras, “Arbitrage: Historical Perspectives.”

  111researchers at Athens University looked at bookmakers’ odds: Vlastakis, Nikolaos, George Dotsis, and Raphael N. Markellos. “How Efficient Is the European Football Betting Market? Evidence from Arbitrage and Trading Strategies.” Journal of Forecasting 28, no. 5 (2009): 426–444.

  111a group at the University of Zurich searched: Franck, Egon, Erwin Verbeek, and Stephan Nüesch. “Inter-market Arbitrage in Sports Betting” (NCER Working Paper Series no. 48, National Centre for Econometric Research, Brisbane, Queensland, Australia, October 2009). http://www.ncer.edu.au/papers/documents/WPNo48.pdf.

  111Economist Milton Friedman pointed out: Beinhocker, Eric. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (Cambridge, MA: Harvard Business Press, 2006), 396.

  112a group of researchers at the University of Lancaster: Buraimo, Babatunde, David Peel, and Rob Simmons. “Gone in 60 Seconds: The Absorption of News in a High-Frequency Betting Market” (working paper, from the Selected Works of Dr. Babatunde Buraimo, March 2008). http://works.bepress.com/babatunde_buraimo/17.

  113Of the 4.4 million bets placed: “Backing a Winner.” Computing Magazine, January 25, 2007. http://www.computing.co.uk/ctg/analysis/1854505/backing-winnerw.

  113“These algorithms mop up any mispricing”: Author interview with David Hastie, March 2013.

  113It currently takes 65 milliseconds: Williams, Christopher. “The $300m Cable That Will Save Traders Milliseconds.” Telegraph, September 11, 2011. http://www.telegraph.co.uk/technology/news/8753784/The-300m-cable-that-will-save-traders-milliseconds.html.

  113one blink of the human eye: Tucker, Andrew. “In the Blink of an Eye.” Optalert, August 5, 2014. http://www.optalert.com/news/in-the-blink-of-an-eye.

  114Traders call the problem “slippage”: Liberty, Jez. “Measuring and Avoiding Slippage.” Futures Magazine, August 1, 2011. http://www.futuresmag.com/2011/07/31/measuring-and-avoiding-slippage.

  115The resulting trade is known as an “iceberg order”: Almgren, Robert, and Bill Harts. “Smart Order Routing” (StreamBase White Paper, 2008). http://www.streambase.com/wp-content/uploads/downloads/StreamBase_White_Paper_Smart_Order_Routing_low.pdf.

  115One example is a “sniffing algorithm”: Ablan, Jennifer. “Snipers, Sniffers, Guerillas: The Algo-Trading War.” Reuters, May 31, 2007. http://www.reuters.com/article/2007/05/31/businesspro-usa-algorithm-strategies-dc-idUSN3040797620070531.

  116As the hooves pounded the ground: Details from: Rushton, Katherine. “Betfair Loses £40m on Leopardstown After ‘Technical Glitch.’” Telegraph, December 29, 2011. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8983469/Betfair-loses-40m-on-Leopardstown-after-technical-glitch.html.

  116Soon after the race finished: Betfair forum thread: “Hope you all took advantage of betfairs xmas bonus.” Geeks Toy Horseracing forum, December 28, 2011. http://www.geekstoy.com/forum/showthread.php?7065-Hope-you-all-took-advantage-of-betfairs-xmas-bonus.

  117“Due to a technical glitch”: Webb, Peter. “£1k Account Caused £600m Betfair Error.” Bet Angel Blog, December 2011. http://www.betangel.com/blog_wp/2011/12/30/1k-account-caused-600m-betfair-error/.

  117“You cannot win—or lose”: Wood, Greg. “Betfair May Lose Out by Not Explaining How £600m Lay Bet Was Accepted.” Talking Sport (blog), Guardian, December 30, 2011. http://www.theguardian.com/sport/blog/2011/dec/30/betfair-600m-lay-bet.

  117The summer of 2012 was a busy time: Details of the events come from: SEC report. “In the Matter of Knight Capital Americas LLC.” File No. 3–15570. October 2013.

  119In 2007, a trader named Svend Egil Larsen: Details of the Larsen case come from: Stothard, Michael. “Day Traders Expose Algorithm’s Flaws.” Globe and Mail, May 16, 2012. http://www.theglobeandmail.com/globe-investor/day-traders-expose-algorithms-flaws/article4179395/; and Stothard, Michael. “Norwegian Day Traders Cleared of Wrongdoing.” Financial Times, May 2, 2012. http://www.ft.com/cms/s/0/e2f6d1cc-9447–11e1-bb47–00144feab49a.html#axzz3hDw6Bgnj.

  120Farmer has pointed out: Farmer, J. Doyne, and Duncan Foley. “The Economy Needs Agent-Based Modelling.” Nature 460 (2009): 685–686. doi:10.1038/460685a.

  120At lunchtime on April 23, 2013: Foster, Peter. “‘Bogus’ AP Tweet About Explosion at the White House Wipes Billions off US Markets.” Telegraph, April 23, 2013. http://www.telegraph.co.uk/finance/markets/10013768/Bogus-AP-tweet-about-explosion-at-the-White-House-wipes-billions-off-US-markets.html.

  121One of the biggest market shocks: Details of the flash crash come from: US Commodity Futures Trading Commission and US Securities and Exchange Commission. Findings Regarding the Market Events of May 6, 2010. September 30, 2010. https://www.sec.gov/news/studies/2010/marketevents-report.pdf.

  122Algorithms sift through the reports: Sonnad, Nikhil. “The AP’s Newest Business Reporter Is an Algorithm.” Quartz, June 30, 2014. http://qz.com/228218/the-aps-newest-business-reporter-is-an-algorithm/.

  122To understand the problem: Keynes, John M. The General Theory of Employment, Interest, and Money (London: Palgrave Macmillan, 1936).

  123“As soon as you limit what you can do”: Quotes come from author interview with J. Doyne Farmer, October 2013.

  124Some traders have reported: Farrell, Maureen. “Mini Flash Crashes: A Dozen a Day.” CNN Money. March 20, 2013. http://money.cnn.com/2013/03/20/investing/mini-flash-crash/.

  124they found thousands of “ultrafast extreme events”: Johnson, Neil, Guannan Zhao, Eric Hunsader, Hong Qi, Nicholas Johnson, Jing Meng and Brian Tivnan. “Abrupt Rise of New Machine Ecology Beyond Human Response Time.” Scientific Reports 3 (2013). doi:10.1038/srep02627.

  124“Humans are unable to participate in real time”: Quote from: “Robots Take Over Economy: Sudden Rise of Global Ecology of Interacting Robots Trade at Speeds Too Fast for Humans” (press release, University of Miami, September 11, 2013).

  125The campus is a maze of neo-Gothic halls: Author experience.

  125“The trees on the right were passing me”: Halmos, Paul. “The Legend of John von Neumann.” American Mathematical Monthly 8 (1973): 382–394.

  125To examine how different factors influenced ecological systems: Details of model from: May, R. M. “Simple Mathematical Models with Very Complicated Dynamics.” Nature 261 (1976): 459–467.

  125This was first proposed in 1838: Bacaër, Nicolas. “Verhulst and the Logistic Equation (1838).” A Short History of Mathematical Population Dynamics (2011): 35–39.

  128May found that the larger the ecosystem: May, Robert M. “Will a Large, Complex Ecosystem Be Stable?” Nature 238 (1972): 413–414. doi:10.1038/238413a0.

  129According to ecologist Andrew Dobson: Dobson, Andrew. “Multi-Host, Multi-Parasite Dynamics” (Infectious Disease Dynamics workshop, Isaac Newton Institute, Cambridge, UK,. August 19–23, 2013).

  129Yet, according to Stefano Allesina and Si Tang: Allesina, Stefano, and Si Tang. “Stabi
lity Criteria for Complex Ecosystems.” Nature 483 (2012): 205–208. doi:10.1038/nature10832.

  131Doyne Farmer has pointed out: Farmer, J. Doyne. “Market Force, Ecology and Evolution.” Industrial and Corporate Change 11, no. 5 (2002): 895–953.

  132One of the most popular types of financial wager: Investment Trends. 2013 UK Leveraged Trading Report. December 23, 2013. http://www.iggroup.com/content/files/leveraged_trading_report_nov13.pdf.

  133If you make a profitable stock trade: HM Revenue and Customs. “General Betting Duty.” 2010. https://www.gov.uk/general-betting-duty.

  133In Australia, profits from spread betting: Armitstead, Louise. “Treasury to Look at Spread Betting Tax Exemption After Lords Raise Concerns.” Telegraph, November 27, 2013. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10479460/Treasury-to-look-at-spread-betting-tax-exemption-after-Lords-raise-concerns.html.

  133In 2006, the US Federal Reserve: Details from: “New Directions for Understanding Systemic Risk” (report on a conference cosponsored by the Federal Reserve Bank of New York and the National Academy of Sciences, New York, NY, May 2006).

  CHAPTER 6

  135In summer 2010, poker websites launched: Dance, Gabriel. “Poker Bots Invade Online Gambling.” New York Times, March 13, 2011. http://www.nytimes.com/2011/03/14/science/14poker.html.

  135Swedish police started investigating poker bots: Wood, Jocelyn. “Police Investigating Coordinated Poker Bot Operation in Sweden.” Pokerfuse, February 22, 2013. http://pokerfuse.com/news/poker-room-news/police-investigating-million-dollar-poker-bot-operation-sweden-21–02/.

  135It turned out that these bots: Jones, Nick. “Over $500,000 Repaid to Victims of Bot Ring on Svenska Spel.” Pokerfuse, June 20, 2013. http://pokerfuse.com/news/poker-room-news/over-500000-repaid-to-victims-of-bot-ring-on-svenska-spel/.

  135Until these sophisticated computer players: Ruddock, Steve. “Alleged Poker Bot Ring Busted on Swedish Poker Site.” Poker News Boy, February 24, 2013. http://pokernewsboy.com/online-poker-news/alleged-poker-bot-ring-busted-on-swedish-poker-site/13633.

  136this was an industry that had spent over $300 million: Surgeon General. Preventing Tobacco Use Among Youth and Young Adults: A Report of the Surgeon General, 2012 (Washington, DC: National Center for Chronic Disease Prevention and Health Promotion Office on Smoking and Health, 2012), Table 5.3.

  136The vote was scheduled: McGrew, Jane. “History of Tobacco Regulation.” In Marihuana: A Signal of Misunderstanding (report of the National Commission on Marihuana and Drug Abuse, 1972). http://www.druglibrary.org/schaffer/library/studies/nc/nc2b.htm.

  136Far from hurting tobacco companies’ profits: McAdams, David. Game-Changer: Game Theory and the Art of Transforming Strategic Situations (New York: W. W. Norton, 2014), 61.

  137Yet tobacco revenues held steady: Hamilton, James. “The Demand for Cigarettes: Advertising, the Health Scare, and the Cigarette Advertising Ban.” Review of Economics and Statistics 54, no. 4 (1972).

  137“Mr. Nash is nineteen years old”: The letter was posted online by Princeton University after John Nash’s death in 2015. It went viral.

  138Despite his prodigious academic record: Halmos, Paul. “The Legend of John von Neumann.” American Mathematical Monthly 8 (1973): 382–394.

  138“Real life consists of bluffing”: Harford, Tim. “A Beautiful Theory.” Forbes, December 14, 2006. http://www.forbes.com/2006/12/10/business-game-theory-tech-cx_th_games06_1212harford.html. Original quote made in BBC show “Ascent of Man,” broadcast in 1973.

  138Von Neumann started by looking at poker: Ferguson, Chris, and Thomas S. Ferguson. “On the Borel and von Neumann Poker Models.” Game Theory and Applications 9 (2003): 17–32.

  139in a book titled Theory of Games and Economic Behavior: Von Neumann, John, and Oskar Morgenstern. Theory of Games and Economic Behavior (Princeton, NJ: Princeton University Press, 1944).

  139Despite his fondness for Berlin’s nightlife: Dyson, Freeman. “A Walk Through Johnny von Neumann’s Garden.” Notices of the AMS 60, no. 2 (2010): 154–161.

  140So, it was only natural: Las Vegas: An Unconventional History. “Benny Binion (1904–1989).” PBS.org, 2005. http://www.pbs.org/wgbh/amex/lasvegas/peopleevents/p_binion.html.

  140Early in the 1982 competition: Monroe, Billy. “Where Are They Now—Jack Straus.” Poker Works, April 11, 2008. http://pokerworks.com/poker-news/2008/04/11/where-are-they-now-jack-straus.html.

  140the thirty-first World Series reached its finale: Details come from video of final at: http://www.tjcloutierpoker.net/2000-world-series-of-poker-final-table-chris-ferguson-vs-tj-cloutier/. TJ Cloutier Poker. “2000 World Series of Poker Final Table—Chris Ferguson vs TJ Cloutier.” October 12, 2010.

  141“You didn’t think it would be that tough”: Paulle, Mike. “If You Build It They Will Come.” ConJelCo 31, no. 25 (May 14–18, 2000). http://www.conjelco.com/wsop2000/event27.html.

  141no poker player had won more than $1 million: Wilkinson, Alec. “What Would Jesus Bet?” The New Yorker, March 30, 2009. http://www.newyorker.com/magazine/2009/03/30/what-would-jesus-bet.

  141consultant for the California State Lottery: Johnson, Linda. “Chris Ferguson, 2000 World Champion.” CardPlayer Magazine 16, no. 18 (2003).

  142Combined with improvements in computing power: Details from: Wilkinson, “What Would Jesus Bet?”

  142Building on von Neumann’s ideas: Ferguson, C., and T. Ferguson. “The Endgame in Poker.” In Optimal Play: Mathematical Studies of Games and Gambling, ed. Stewart N. Ethier and William R. Eadington (Reno, NV: Institute for the Study of Gambling and Commercial Gaming, 2007).

  143“You always want to make your opponents’ decisions”: Ferguson, Chris. “Sizing Up Your Opening Bet.” Hendon Mob, October 7, 2007. http://www.thehendonmob.com/poker_tips/sizing_up_your_opening_bet_by_chris_ferguson.

  143As well as winning more money: Harford, “Beautiful Theory.”

  143“How do I win the most?”: Wilkinson, “What Would Jesus Bet?”

  144He once taught himself: Johnson, “Chris Ferguson.”

  144Starting with nothing: Details of challenge from: Ferguson, Chris. “Chris Ferguson’s Bankroll Challenge.” PokerPlayer, March 2009. http://www.pokerplayer365.com/poker-players/player-interviews-poker-players/read-about-chris-fergusons-bankroll-challenge-and-you-could-turn-0-into-10000/.

  144“I remember winning my first $2”: Ferguson. “Chris Ferguson’s Bankroll Challenge.”

  146When Ignacio Palacios-Heurta: Palacios-Heurta, Ignacio. “Professionals Play Minimax.” Review of Economic Studies 70 (2003): 395–415.

  147Von Neumann completed his solution: Details of the dispute were given in: Kjedldsen, T. H. “John von Neumann’s Conception of the Minimax Theorem: A Journey Through Different Mathematical Contexts.” Archive for History of Exact Science 56 (2001).

  149While earning his master’s degree in 2003: Follek, Robert. “Soar-Bot: A Rule-Based System for Playing Poker” (MSc diss., School of Computer Science and Information Systems, Pace University, 2003).

  150Led by David Hilbert: O’Connor, J. J., and E. F. Robertson. “Biography of John von Neumann.” JOC/EFR, October 2003. http://www-history.mcs.st-and.ac.uk/Biographies/Von_Neumann.html.

  150some inconsistencies in the US Constitution: “Kurt Gödel.” Institute for Advanced Study Online, 2013. https://www.ias.edu/people/godel.

  151poker bots grew in popularity: Kushner, David. “On the Internet, Nobody Knows You’re a Bot.” Wired 13.09 (September 2005). http://archive.wired.com/wired/archive/13.09/pokerbots.html?tw=wn_tophead_7.

  151Just as stripped-down versions of poker: Details of strategies given in: Rubin, Jonathan, and Ian Watson. “Computer Poker: A Review.” Artificial Intelligence 175 (2011): 958–987.

  152technique known as “regret minimization”: Ibid.

  153In 2000, researchers at the University of Iowa reported: Bechara, A., Hanna Damasio, and Antonio R. Damasio. “Emotion, Decision Making and the Orbitofrontal Cortex.” Cerebral Cortex 1
0, no. 3 (2000): 295–307. doi:10.1093/cercor/10.3.295.

  153This contrasts with much economic theory: Cohen, Michael D. “Learning with Regret.” Science 319, no. 5866 (2008): 1052–1053.

  154at the University of Alberta in Canada: Schaeffer, Jonathan. “Marion Tinsley: Human Perfection at Checkers?” http://www.wylliedraughts.com/Tinsley.htm.

  155The name was a pun: Propp, James. “Chinook.” ACJ Extra, 1999. http://faculty.uml.edu/jpropp/chinook.html.

  155That’s 10 followed by twenty zeros: Estimate given in: Mackie, Glen. “To See the Universe in a Grain of Taranaki Sand.” North and South Magazine, May 1999. http://astronomy.swin.edu.au/~gmackie/billions.html.

  155Chinook “pruned” this decision tree: Details of competition in Schaeffer, Jonathan, Robert Lake, Paul Lu, and Martin Bryant. “Chinook: The World Man-Machine Checkers Champion.” AI Magazine 17, no. 1 (1996). doi:http://dx.doi.org/10.1609/aimag.v17i1.1208.

  156he coined the infinite monkey theorem: Borel, E. M. “La mécanique statique et l’irréversibilité.” Journal of Theoretical and Applied Physics, 1913.

  158“Checkers is solved”: Schaeffer, Jonathan, Neil Burch, Yngvi Björnsson, Akihiro Kishimoto, Martin Müller, Robert Lake, Paul Lu, and Steve Sutphen. “Checkers Is Solved.” Science 317, no. 5844 (2007): 1518–1522. doi:10.1126/science.1144079.

  158John Nash showed in 1949: Demaine, Erik D., and Robert A. Hearn. “Playing Games with Algorithms: Algorithmic Combinatorial Game Theory.” Mathematical Foundations of Computer Science (2001): 18–32. http://erikdemaine.org/papers/AlgGameTheory_GONC3/paper.pdf.

  159Twenty-six moves later: Schaeffer, Jonathan, and Robert Lake. “Solving the Game of Checkers.” Games of No Chance 29 (1996): 119–133. http://library.msri.org/books/Book29/files/schaeffer.pdf.

  160“might have died in 1990”: Schaeffer et al., “Chinook.”

  160Doyne Farmer has started to question: Galla, Tobias, and J. Doyne Farmer. “Complex Dynamics in Learning Complicated Games.” PNAS 110, no. 4 (2013): 1232–1236. doi:10.1073/pnas.1109672110.