Deep Dive: Bankroll and bet sizing

How to not lose your life savings

With all the headlines still focused on the Middle East and the previous deep dive covering majority of the markets while the older deep dive covering the long-term thesis, I had some time this week to focus on other prediction markets related topic. While majority of my articles focus on what markets to trade on how to position, there is also another important element that can decide between being in the green and losing your life savings.

I have already covered approach (calculating internal odds and EV) as well as arbitrage and hedging. To complete the trifecta you lack an answer to one question: how much? Today I will focus on different strategies that enable bettors to bet long-term and realize the EV of the bets they take. It would be a shame if you lost your bankroll with one or a couple of bets gone wrong.

Some of you may already know this, but I aim for my newsletter to provide all the necessary info for newcomers so they can start betting and understand what they are actually doing. You can be EV+ and yet go all the way down to zero. Why? Variance. While I prefer to focus on the upside, the downside risk still exists so let’s do it.

I will start with what is bankroll and how to approach it. Then we will go through different methods of bet sizing with pros and cons, finally arriving at what I (and I think most pros) use.

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Bankroll

“Bankroll? Don’t you just YOLO your last paycheck on some ending soon outlier and this one time it will work an you will buy a Porsche?”

Well, you can, but most likely you will end up in a tent rather than with a Porsche. If you are serious about prediction markets then you have to think about how much you actually bet. We are dealing here with uncertainties - even if the bet is EV+ you can still lose money. Variance is key, you can be a good bettor and end up with a red year! It happens. If you do not trust me then go to any poker variance calculator and see how often you end up with a loss. You can see a poker sample below with quite generous EV (8 BB / 100 hands):