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Kelly Betting on Horse Races with Uncertainty in Probability Estimates

Author

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  • Michael R. Metel

    (Laboratoire de Recherche en Informatique, Université Paris-Sud, Orsay, 91405 France)

Abstract

We investigate the problem of gambling with uncertainty in outcome probabilities. Stochastic optimization models are proposed for optimal investing on events with mutually exclusive outcomes when probabilities are estimated using multinomial logistic regression. Special attention is given to the case of there being two outcomes and the general case of many outcomes. An empirical study using simulated data was conducted where the loss of return from probability estimation error was observed, and superior returns were achieved taking it into consideration.

Suggested Citation

  • Michael R. Metel, 2018. "Kelly Betting on Horse Races with Uncertainty in Probability Estimates," Decision Analysis, INFORMS, vol. 15(1), pages 47-52, March.
    • Handle: RePEc:inm:ordeca:v:15:y:2018:i:1:p:47-52
    DOI: 10.1287/deca.2017.0359
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    References listed on IDEAS

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    1. L. C. MacLean & W. T. Ziemba & G. Blazenko, 1992. "Growth Versus Security in Dynamic Investment Analysis," Management Science, INFORMS, vol. 38(11), pages 1562-1585, November.
    2. Donald B. Hausch & William T. Ziemba & Mark Rubinstein, 1981. "Efficiency of the Market for Racetrack Betting," Management Science, INFORMS, vol. 27(12), pages 1435-1452, December.
    3. Ruth N. Bolton & Randall G. Chapman, 2008. "Searching For Positive Returns At The Track: A Multinomial Logit Model For Handicapping Horse Races," World Scientific Book Chapters, in: Donald B Hausch & Victor SY Lo & William T Ziemba (ed.), Efficiency Of Racetrack Betting Markets, chapter 17, pages 151-171, World Scientific Publishing Co. Pte. Ltd..
    4. Rose D. Baker & Ian G. McHale, 2013. "Optimal Betting Under Parameter Uncertainty: Improving the Kelly Criterion," Decision Analysis, INFORMS, vol. 10(3), pages 189-199, September.
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    Cited by:

    1. Vicki M. Bier & Simon French, 2020. "From the Editors: Decision Analysis Focus and Trends," Decision Analysis, INFORMS, vol. 17(1), pages 1-8, March.

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