Why locking profits (aka hedging bets) is a bad idea

I’ve been hearing so many sports betting experts and casual gamblers talking about the power of hedging bets that I felt a huge need to write this: no, there is no power; locking profits is a bad idea. Decisions in life are situational. For some people, in certain situations, hedging might be a good idea. In the long run though… it’s a bad play.

Axioms:

Locking a profit (placing a hedge bet) can only be done after the odds have been corrected.

Corrections usually move the odds towards the true probabilities.

From these axioms, one can reason further that the hedge bet will rarely be a value bet. If it were to offer value indeed, then most probably the first bet was a mistake or certain events occurred that changed its status. In conclusion, the expected value of locking profits cannot be higher than the ROI achievable by simply placing value bets. We’ll leave the variance talk aside for another article, but for now keep in mind that the lower variance is not worth taking into consideration unless you’re able to consistently lock profits.

For the math lovers out there, let’s strengthen these assertions with an example!

Since odds are actually a method in which probabilities are expressed, I will do the whole example in probabilities. We’ll consider a bookmaker which simply adds 2% to the probability of each outcome in order to offer the odds. The event is A vs B and the odds are 52% on either side. You find out before the bookmakers and the public that A is actually the favorite to win and you estimate that the probability is reflected in these honest odds: 57%. If you bet on A, the ROI (or better said EV) should be:

ROI = 57*(100/52-1)-43 = (57*100-57*52-43*52)/52 = (5700-2964-2236)/52 ≅ 9.6154%

Explanation: 57 times out of one hundred, you will take this profit, expressed as a percentage of your stake: 100/52 - 1; the rest of 43 times you will lose your full stake. The difference between them is the expected value.

Time passes and the odds on A go down until the honest odds reach 57%, therefore the bookmaker now offers 59% and 45% respectively. If you were to lock profits, you’d have to bet on B. How much? Well, to find out the answer in percentage of the initial stake, let’s write the profit locking equation as if the bet on A was 1:

1*(100/52-1)-x = (100/45-1)*x-1

Explanation: This is the profit locking equation (it helps you determine the size of the hedge bet in order to make an equal profit, regardless of the event outcome):
profit made if the initial bet wins - stake of the hedge bet = profit made if the hedge bet wins - stake of the initial bet

x is 45/52 meaning we would have to place a bet on B with the stake equal to 45/52 of the initial bet in order to lock an equal profit, regardless of the outcome. It’s easy to check if the calculations are correct. If A wins, the ROI would be:

ROI = (100/52-1)-45/52 = (100-52-45)/52 = 3/52 ≅ 5.7692%

If B wins, the profit is

ROI = (100/45-1)*45/52-1 = (100-45-52)/52 = 3/52 ≅ 5.7692%

There you go… we would achieve a higher expected value by simply not placing the second bet. Keep it simple: find value bets, don’t worry about hedging them. I’m waiting for your opinions below.

1 comment

  • Nice article. While I agree that making value bets only to lay them when the odds probabilities reach actual probabilities doesn’t make much sense, there’s certainly times where hedging can be a viable option.

    For example, by hedging your bet in-play/ toward the end of a match (assuming your bet is winning), the difference between the EV of the initial value bet and the hedge bet would likely be much smaller than in your example.

    You say the issue of variance is for another article, but shaving off a few points of EV to lock in profit can be an attractive prospect for the more risk averse bettors or those working with a fixed betting bankroll.

    So long as people’s hedges are +EV I don’t think you can call them a ‘bad play’. Certainly not optimal, but if they can maintain long term profitability they’re not doing so bad!

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