Last week I discussed the idea that you should only bet in cases where you have a "margin of error" (or expected return) of around 10%-20%. Some gamblers like to come up with their own probabilities of an event happening before they look at the actual odds on offer. They then compare the two to see where there is potential value.
For example, let's take a bet on an event that you believe to have a 50% chance of actually occurring. If you were offered 3/2 (40%), then that would be a good bet, given an expected return of 25%. On the other hand, if you were offered narrower odds of 6/5 (45.4%), then you should think a lot harder about whether it is worth doing, since the expected return is a lot less, at around 10%.
Another variable that you should take into account when deciding on a "margin of error" is the length of time that your money will be tied up for. In principle, bets that take longer to pay out should have a bigger expected return.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
So if the bet is going to take two years to pay off, you should be looking for a 20%-30% return; a three-year bet should imply an expected return of 35%-45%. While I have recommended a few very long-term bets beyond three years, they've only been in cases where I think the odds are very favourable.
At the opposite extreme, some gamblers are very happy to accept very short odds on "certainties", arguing that a small return over a very short period is equivalent to a much larger return over a longer period.
While short-odds betting can be profitable, I would be wary of anything shorter than 1/8 (90%), simply because it is very easy to convince yourself that an event is certain to happen, when in fact there is always a small chance that the unexpected can occur. As the saying goes, "a week is a long time in politics".
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
1,000 children hold over £100,000 in a junior ISA – how to grow tax-free nest egg for your child
How to start investing: a beginner’s guide
