Why I bet £900k on the Scottish referendum | Hacker News Reader

Why I bet £900k on the Scottish referendum

bbc.co.uk

83 pointsjjp65 comments

The author focuses on why "No" would probably win but the determining factor should have been whether his assessment of the actual odds were better than the bookmaker's implied odds.

The bet was close to even odds. Also since this was a one time bet, with the downside of (probably) him never betting again, even if it payed out 10x the money he bet, you would still want to be pretty sure you were right -- and not just "making the right bet" since the downsides far outweigh the upsides. This isn't "on a long enough timeline" bet, it is a "I need to be correct this time" bet.

It wasn't even odds but I agree about "picking up nickels in front of steamrollers".

I guess it depends on what you mean by "close to even odds," but he paid out on average 1:5.

Knowing how well his bankroll can stand up to the high variance would be nice.

Yes, risk preference is the other important factor.

I had to transfer a considerable sum of GBP to EUR close to the vote. The bookies odds were a very good indication (2/7) of how many people had bet on a "No" vote. Basically the bookies odds are based on covering their backs ( and they are good at it). They don't often get it wrong. When lots of Scottish people vote on "No" then it is a damn better signal than pollsters in the street.

Since the expected upside of a "No" was low (it went from ~1.258 to ~1.271 after the results came in), but the projected downside of a "Yes" was high (estimated at ~10% drop due to the 2 years of uncertainty in the markets - Scottish independence was scheduled for 2016), I decided to hedge on similar odds with the currency transfer.

I'm happy with the decision. I could have got more EUR if I had waited, but that's what hedging is all about right?

To all the UK HN readers here. I grew up in Australia and live in the US. When I visit the UK I'm staggered by just how much you can bet on everything As I go home I've noticed it is more prevalent there now too then when I grew up there. Do people in the UK discuss how mad the UK are about betting? Or do they not think they are particularly? Is there any sort of active discussion in terms of how healthy it is? I'm not for outlawing gambling or drinking or prostitution but to think that there aren't a meaningful % of addicts for whom this easy access destroys their life is also naive. Does that come into play at all?

It's pretty heavily regulated (you won't really see any evidence of black-market bookmakers in the UK although presumably they do exist), and most bookmakers are pretty keen on "social responsibility". At least for the online bookies, there are algorithms which attempt to spot "problem" gamblers and attempt to manage them (eg by limiting how much they can deposit or bet or even by excluding them altogether) and I don't think you'll find a regulated bookie who you can end up in debt with (you need to deposit the money with them before you can bet - that's not to stop you from borrowing the money from elsewhere but there's little which the bookies can do about that).

I think the social stigma around betting is lifting a little in the UK, particularly in terms of the casual "I'm going to watch the match anyway, it'll be a bit more exciting if there's a bet riding on it as well" gambler. Celebrity endorsements probably help with that, as does sports sponsorship. I don't really know anything about professional gamblers, though.

I don't think anyone here in the UK thinks that the UK in general is mad about betting, but I could be wrong.

This is all entirely my own opinion...

I agree that the UK being 'mad about betting' is a gross exaggeration, but bookmakers being 'keen on social responsibility' - other than as a figleaf - seems like an exaggeration in the opposite direction. In fact, betting shops appear to derive a lot of revenue basically from money-laundering: http://www.theguardian.com/uk-news/2013/nov/08/gambling-mach...

Money laundering potential is a particular problem for bookmakers, that's true. The big name ones really don't want bad press, though, which I imagine is where most of the social responsibility stuff comes in (as well as trying to protect problematic people from themselves).

Not sure about Australia but the US has a fairly puritanical culture. I always figured the UK was probably pretty normal for the size of the gambling industry in a first world country and the US was the outlier.

As someone who has family in the UK and Australia, I'd say the gambling system is worse in Australia (New South Wales). Pubs with wall to wall one armed bandits (pokies). The most you'd see in a pub in the UK is one.

But casino gambling--including slot machines--has almost nothing to do with chance. You are as certain as can be to lose if you play long enough.

With betting on things like the Scottish referendum there is a chance for an informed bettor to best the game, and people actually do this. There have been cases in Canada of people making a living on sports betting, to the extent that they got in trouble with Canada Revenue over whether their winnings were due to "chance" or "skill" (which are taxed differently.)

Bookies cannot be experts on everything, so particularly for a one-off like Scottish independence the odds of an informed bettor making money are not bad.

So the comparison of gambling behaviour depends very much on the kind of gambling being done. If it is conventional casino gambling it is simply losers paying to lose--the converse outcome is simply too low probability to be worth mentioning (for comparison: sure... it's possible to jump out of an aircraft without a parachute and survive, but it isn't an eventually anyone ever takes into account when faced with the practical choice, so it isn't clear why anyone takes into account the possibility of being a winner when faced with the choice of casino gambling.)

In sports betting and betting on odd-ball events, on the other hand, it is at least theoretically possible for a well-informed bettor to win (but realistically: you are probably not that bettor, so it pays to be very cautious and never, ever bet more than you can afford to lose, because you will sometimes lose.)

> But casino gambling--including slot machines--has almost nothing to do with chance.

Yes, it does.

> You are as certain as can be to lose if you play long enough.

That doesn't mean that the individual instances of gambling have nothing to do with chance -- its a product of the aggregation of the effects of chance. Given an infinite number of iterations of any random gambling scenario, you are eventually going to hit a losing streak sufficient to consume your entire bankroll (the size of the bankroll relative to the stake in any given iteration affects how many iterations it takes before you are more likely than not to have hit this point, but that's about it.)

But the existence of this effect (Gambler's Ruin) doesn't mean that the type of gambling has nothing to do with chance -- indeed, it only applies because gambling is about chance.

Indeed. There are more poker machines in New South Wales, than there are in Las Vegas.

I'm from the UK now also living in the US. Honestly I didn't really notice it until I left. Gambling has been a big part of British culture for a long time and you can bet on just about everything. This seems to be in stark contrast to the U.S. where the opportunities to gamble are far more limited.

As an example, bets on whether it will snow on Christmas Day are popular. Unusual bets are often written about in the news, e.g., http://news.bbc.co.uk/2/hi/uk_news/england/beds/bucks/herts/...

Yes this! I suspect it's a "frog boiling in water problem" One thing that struck me was the ticker tape of betting related activities that runs along the bottom of news/sports TV.

I've got 5 quid on Kate having a ginger baby (bet against my friends, not a betting shop).

That's as far as it's ok to go if you ask me. The betting shops, gambling outfits and lottery prey on people's desire to be "better off". It's another form of servitude if you ask me. There are responsible gambling campaigns but daytime TV is all about betting and online bingo and stuff so it's about the same as saying not to smoke whilst giving away the first 10 cigarettes for free.

If you've got 25 minutes to spare, this takes a comedy twist on it but the underlying story shows how much it affects our culture here in the UK: https://www.youtube.com/watch?v=lAXFHRdeLqw

(Black Books - A Little Flutter)

Like everything in the UK, it's a class issue. My dad's friends bet, but I don't think anyone in my social circle would. My impression was that sports betting is more popular in e.g. the U.S.; for all that betting shops have ads for football I don't think that many people would actually bet on it. Horse racing exists as a thing that people bet on, but I think it's slowly dying out, like greyhound racing did before it.

It's not seen as a big social problem IME; I've heard far more fears expressed about our pub culture than our betting culture.

As an American living in London, I have to say the betting shops come off as much more unsavory than the pub culture. Generally the pub culture seems to be enjoyed in good fun by everyone across class and age boundaries, and yeah there is the ugly side of people passed out drunk on the pavement after 11pm or young women projectile vomiting into their friends handbags on a crowded tube platform, but given the number of people out drinking it seems like more a statistical rounding error of a few people just having a bit too much fun.

The betting shops on the other hand seem disproportionately full of deadbeat layabouts night and day. Just walking down the street the front of the William Hill is the most likely place you'll see someone who appears to belong to a Dickensian London.

Anyway, that's just my first impression as a puritanical yank.

Seems pretty accurate.

Saying that, take a trip to A&E (ER) on a weekend and see if you still think it's too much fun.

The number of people gambling in the US and the UK are fairly similar, both somewhere between 60 and 70 percent. Government lotteries are the most popular form in both countries.

This is the one thing that always amused me.

I live in Minnesota and they've gone to great lengths to minimize gambling. Any kind of initiative is met with derision and all kinds of attacks that "gambling brings in bad elements and gambling is bad, it destroys families". Meanwhile, I can go into any supermarket, gas station or convenience store and play a myriad of state lottery games.

The irony is incredible.

Isn't gambling extremely limited in most of the US? If you take away lotteries (which I personally wouldn't consider gambling) I wonder what the figures are.

Why do you consider lotteries not to be gambling? In a literal sense they are clearly gambling.

True but they are very different to betting on sports, events etc. For the lottery you hand over some money, get some random numbers and you might win (same idea with scratch cards). If you bet on say, the result of a football game, you are given odds, you can look at the statistics of both teams, and you can get a better idea of the risk. You can actually use your brain a little. Also, I think while a lot of kids would be told that gambling is bad/dangerous, and they shouldn't do it, their parents likely play the lottery and let the kids pick the numbers.

The odds are so long on lotteries that it's not really the same experience and can't result in some of the same problems.

People don't borrow $10,000 to buy Powerball tickets so they can chase their losses, but they do for types of gambling where there's a good chance of winning in one night, like poker or sports betting. Even the terminology is different: you 'buy lottery tickets' instead of 'wagering on the lottery', reflecting the feeling that the money is spent and you don't expect a return.

And winnings are tax free unlike some places. The high street betting shops are upsetting many. Until recently the government even owned it's own bookmaker.

And winnings are tax free unlike some places.

Gambling winnings should be tax-free, unless gambling losses are tax-deductible. Taxes should apply to the production or consumption of utility, not to its random shuffling around.

> Taxes should apply to the production or consumption of utility, not to its random shuffling around.

The Random shuffling part made me smile. Though, that's only looking at individual cases. When you look at the global picture, it's no more random shuffling and the lottery is the tax in its own existence.

Sure, and winnings by people who are in the business of gambling (either professional poker players who are gambling on themselves, or casinos who are implicitly gambling against their customers) should be taxed, because at that point it isn't merely random shuffling.

>>Taxes should apply to the production or consumption of utility

Then why do we have inheritance tax? It's a tax on something that already had tax paid on, nothing is produced and nothing is consumed.

Do any businesses regularly use betting markets such as this for hedging? If so, that could have certainly moved the odds to give great odds to a "no" bet.

Some businesses could have been severely negatively impacted by a yes vote, so they can hedge against that risk by betting on 'yes'. Is that sort of thing done? Is it legal? Or do they just use different markets for this sort of thing? Buying or selling futures contracts on the pound could be highly correlated with the vote outcome.

As he alluded to in the article, the bookies were not prepared for the large sum of money that he wanted to wager - in total. These sort of prop bets typically don't allow for such a larger amount to be wagered.

Not sure if he knew or not, but with so much juice on a "no" vote, he would've single handily moved the numbers too much in his favor.

The art of being a good bookie is making sure you have action on both sides of a bet - that way you never lose. By taking that much heat on an obscure bet would cause a lot of people to either move all of their money to one side, or everybody would be spooked and cancel all their bets.

If the bookie were to take that bet like he wanted to, it would have put him out of business either way.

So just to be clear, if he wins he makes 22.22~% profit (200K), if he loses then he's out 900K (100% loss). While that is a great ROV (relative to both interest and or the stock market), it does seem like the stake was too high relative to the reward.

Could they not have taken that money, purchased a couple of homes (e.g. 2x 275k), renovated them up to modern standards (e.g. 2x 60-85K), and then resold them? A lot of people do that and it has a very high ROV also (as people get into bidding wars more easily on "ready to move into" property Vs. ones in need of renovation).

Plus with the property thing you always ultimately have the property/land which can be sold. So the risk isn't really 100% of the properties' value, it is at most the difference between purchase price and raw land value. Even in the 2008 recession a lot of people in the property game did "alright."

He wouldn't have made 22% profit in a matter of days investing in property (and would have paid stamp duty and capital gains tax even if he could). He could make 22% in a few years with no effort whatsoever investing in a relatively low risk bond.

Short term speculation with high returns always carries a very high degree of risk; that's why the very high returns exist. And yeah, bookmakers take a wider spread than most markets.

You could definitively answer how much he should have bet using what's known as the 'Kelly criterion.' Basically you need to consider the total wealth of the individual and the edge they believe they have (ie. bookies offer odds at 4/1 while the gambler reckons it's longer).

http://en.wikipedia.org/wiki/Kelly_criterion

Whether this was a rational bet depends on how good he thought is edge was (perhaps allowing for some margin of error) and how rich he already is.

The Kelly criterion applies for repeated bets. It optimizes the logarithmic expected winnings. I am not sure how it applies for a single bet. I guess it depends on one's like or dislike of risk.

I was wondering about that but I don't see how it wouldn't apply. In a series of bets it guarantees you wont go bust and will maximise your long term winnings (I'm probably missing some subtleties here so corrections welcome). But the whole concept can be traced back to a letter/essay by one of the Bernoulli family, in which the example was a one off bet.

One other thing: it has always bothered me that people should have a 'like or dislike of risk.' Something about the concept doesn't sit right with me, unless we're talking about having an adrenaline rush. That's why I liked the Kelly criterion - it takes all notion of personal preference out of the picture and gives you a universal formula.

It's not that there's a like or dislike of risk.

Preference orderings are either (locally) convex or concave. Risk aversion is just that, a preference ordering over mean/variance bundles.

There was an econ textbook that gave a memorable example of a (qualified) exception to convexity: ice-cream and olives. Usually I'll want to have ice cream and olives in my fridge, but I don't want them at once! - so pure ice-cream would be prefered to a mix of them at my plate, right now.

Risk aversion does not imply, on its own, that you don't want risk at all. It implies that you want some mix of risky and non-risky assets; while concavity towards risk would imply you want either one or the other.

The problem with making risk aversion/convexity work with lotteries and such is that the price you're supposed to pay for lotteries is off your utility surface. But: since lottery tickets and small bets are relatively small in the context of your budget, one can figure that the mispricing in your overall mean/variance bundle is small, and that the emotion of betting may be the case of not wanting to optimize for a grey wall, an optimal mixture.

Finally, re: universal formulae, I think you'd profit from reading Elie Ayache's _The Blank Swan_.

But... why should anyone have a different 'preference' from another person?

Thanks for the book recommendation.

The Kelly criterion is actually pretty simple. So it can actually be derived from a few different optimization criteria.

Risk aversion is just something we see in practice. (And sometimes risk loving; like when people play the lottery and even take a negative expected value in exchange for a very small probability of a huge win.)

Unless this bet is the last one the author ever makes then the Kelly criterion will still apply.

Well, one option involves the hassle of renovating two homes (have you ever watched Grand Designs? The windows never fit...), the other involves walking into your nearest bookies. Perhaps if you have that sort of money to throw around you might like to take the quick and easy option.

Flipping property like that is more like a job (with a big risk component). This was pure speculation.

You're assuming they have the money in hand long enough to invest it in real estate, and the time, masochism and expertise to do two renovations.

Completely valid points, and I have to imagine that the author would agree with you. I can't help but to imagine the novelty of the wager and the amount he was willing to risk, played a large part in him ultimately following through.

I think the analysis was a cover. Some m months ago in the polls a yes vote was universally preposterous. In reality it was quite close.

I would like to know how much Deutsche Bank had bet on the referendum, or rather on Sterling. They released a research report saying the case for No was overwhelming, a week before the vote. Sterling had just been rocked by the one poll that put Yes ahead (after a series of tightening polls). Implied volatility jumped up. Had they neglected to hedge their currency exposure?

NOTE: the difference was ~5% which means that once again financial crooks don't know nothing about the subject at hand.

Why should they? In case they lose the bet, German taxpayer will pay. Business as usual.

Uh, no, the difference was actually higher than 10%.

http://en.wikipedia.org/wiki/Scottish_independence_referendu...

Where would one even go to place such a bet?

Also, how can you assess the counter-party risk here? You're letting someone hold the equivalent of $1.4MM for some number of weeks/months; there has to be some risk that they will default on what is effectively a loan. Can you purchase an insurance policy on something like this?

In this case they went to William Hill, an 80 year-old publicly listed and regulated company that made >£200M in profit off £1.5bn revenue last year.

The counterparty risk was negligible, especially compared with the rather high risk the pollsters all made systematic errors in their surveys (it's not particularly difficult to imagine a scenario in which people with a stated intention to vote for independence turned out to be much more likely to actually bother to vote; actually the main reason why I didn't try the lower risk, lower return version of this bet and place all my liquid funds in a FTSE100 index fund or ETF the day before)

William Hill is listed on the London Stock Exchange, with a market cap of over £4bn. I think they're good for it.

>Where would one even go to place such a bet?

William Hill, one of the largest bookmakers in the UK. It's mentioned in the article.

UK bookmakers will take bets on pretty much anything.

Here's a list of some of the 'novelty' bets going at the moment:

http://www.oddschecker.com/novelty

Maybe you have a time travelling machine and you know that aliens will show themselves in 2016? Quick! Place a bet!

http://www.paddypower.com/bet/novelty-betting/novelty-bets/a...

But it gets more specific than that. Here's someone who had a bet accepted that his 9 year old son would end up playing for Manchester United football club:

http://www.dailymail.co.uk/news/article-2209493/Ryan-Tunnicl...

Well, I certainly don't have that much money to bet, but I wasn't surprised by the results. Just because a couple of late polls suggested that "Yes" was ahead doesn't mean much when the bulk of the polls still showed "No" in the lead. You have to understand that the polls only sample a (relatively) small number of people and therefore, when taken individually, have large margins of error that are sadly rarely reported. You have to consider all of the polls together as a set.

If I were the UK government, I would have paid for a last minute "YES" poll : Just to jolt the NO voters into going to vote (because otherwise, they may have not bothered, seeing that the polls were all pointing their way anyway).

Some math on this assuming the article is correct. He was offered 5:4 odds so the juice was 2.8% given what he should've won vs what he got. The 5:4 odds mean he had to be at least 44% (+2.8%) confident just to break even, moreso to make a profit.

Make sure to listen to the audio clip, the button kinda blends in. They discusses some things which aren't in the text.

Weird, William Hill's corporate cheques are drawn from the very same bank branch where I have my account.

I don't mean to be pedantic, but it should be the "Scottish" referendum, and not "Scotish". If an admin could add the second "t" it would be greatly appreciated, at least to match the BBC article's title.

Ack! How did we miss that? Thanks!

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