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On jstJSH

This is a short poem I was inspired to write after thinking about how we can use the same phrase in a million different ways. I've never posted any of my poetry here before, but if people enjoy it; it will certainly be something I continue to do.

J. x

Risk vs. Reward: Playing within your tolerance

On Sharplayer

A comprehensive understanding of risks and their payouts is essential to making long term profitable decisions. The key aspects are two-fold:

1) Is the reward relatively greater than the likelihood of the event occurring2) How much risk is worth taking for the reward

I'm going to look at both of these separately, as they inform two interrelated areas of gambling.

The first point considers the long-term profitability of the action, other referred to as the 'value'.Where this is negative, it means the return for an investment is lower than the relative likelihood of of an event occurring. Normally this is absorbed into the bookmakers over-round, or the casinos house edge. Value can also be found where individuals have a greater access to information than the market, and therefor known an event is more likely to occur than the price they can buy the line at. This can be seen where bookmakers change their prices, or odds, to reflect new team information or weather conditions which have changed the probability of a certain outcome. In a casino we can see the house edge on fixed odds games such as european roulette, where a straight-up bet on a number pays 35/1 despite their being a total of 36 numbers. Therefor the relative payout vs the actual probability of the event occurring is negative, hence the saying "the house always wins"In order to make a profit long term in gambling, we must ensure that the reward from our actions is greater than the relative probability of the event occurring. Otherwise we will loose money at the rate of this difference.

The second point considers how far you should expose yourself, and your risk aversion.An aversion to risk describes a persons reluctance to uncertainty. The greater ones risk aversion, the less they are willing to risk relative to the expected payout. The decision to invest in a Cash ISA for example, has a lower risk profile than the same money in stocks and shares, and appeals to investors with a higher risk aversion. In gambling the same is true where we make decisions with a positive expected return in so far as how much we risk to achieve the value. This is some function of the size of the bankroll, the value of the opportunity, the probability of it occurring and a complex bag of psychological interferences. A lot has been written on this, from the gamblers ruin to kelly staking plans. At some point, everyone who wants to 'go pro' will have to consider their risk aversion and it's impact on the value of the decisions they are making. Quite frankly, there is a lot of value in areas with which you cannot hedge out the risk.

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