Betting on politics: How to set your margin of error

Matthew Partridges explains how to decide on your margin of error when gambling on politics.


Setting your margin of error is important
(Image credit: Richard Baker)

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.

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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".

Dr Matthew Partridge

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.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

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.

Follow Matthew on Twitter: @DrMatthewPartri