We recently reviewed ‘Trading Bases’ - the story of a Wall Street trader who turned to baseball betting after he was run over by an ambulance and fired by the investment bank that employed him while he was injured. In this follow-up interview, we learn more about Joe Peta, the man who developed a successful baseball-betting model and wrote a book about how he did it. Find out what Joe thinks the future has in store for betting and his advice for gaining an edge over bookmakers.
If we were playing a game of “You wouldn’t know it looking at him/her but…” I guess I’d say, I wrote a book that Charlie Rose, Billy Beane and Maria Bartiromo all loved and interviewed me about.
I never worried about that for a number of reasons. Firstly, models always evolve and in my case, while the framework is the same now as five years ago, there are elements of it from then that make me cringe now. Secondly, in no way did I ever feel like I would have an effect on the overall pricing of the baseball market.
"I calculated an expected edge of 12-14% return to investors over a full season in 2012."
Finally, the whole point of the book was to celebrate the critical reasoning overlap between asset management in the financial industry, the sabermetric side of baseball and sports betting.
As far as continuing to bet, I calculated an expected edge of maybe a 12-14% return to investors over a full season in 2012. The $1 million investment could have been doubled before I would have run into limits in Vegas. So let’s call it an expected return of 12% on $2 million of $240,000.
Using a traditional hedge fund split of 20% profits for the manager, it would come to $48,000. That just doesn’t compete with a professional wage in other industries.
I have no coding skills, so probably more time than a millennial would need! Truthfully, it was a non-stop endeavour for two years. The motivation was the fact that I was injured, couldn’t work and needed something to occupy my time while I recovered.
Without a doubt it would be tight spreads. I spent a lot of time in the book detailing why baseball betting is an attractive market for a model-based bettor and the biggest, of course, is the Dime Line. Any bookmaker that adheres to that, and even narrows it a bit, is the first place I’d turn.
That said, and you’ll notice I pointedly didn’t mention limits, my professional background was that of a market-maker stocks trading and I based my entire franchise around customer service. Capital is obviously a role of a book or market-maker, but the most valuable role one can provide is pairing two different deep-pocketed bettors/investors.
I see more entity betting on the horizon and for it to thrive, I believe the bookmaking side of the business will be most successful if it offers new products and, most importantly, slowly shifts from a principal business to an agency business.
Ultimately, the size of the business can grow a lot more if they adopt a hybrid model that involves collecting rents as opposed to solely risking capital.
Having traded stocks professionally for well over a decade, I am quite comfortable with risk and the ups and downs of risking capital so I don’t recall ever getting discouraged.
I think measuring and predicting defensive value is the biggest market inefficiency that currently exists. The beautiful thing about baseball is there are so many different inputs that everyone can calculate and weigh differently.
In a market like baseball, with small margins courtesy of the Dime Line, there are many, many different “answers” that different model-based bettors can arrive at, which makes for a market that adjusts constantly.
With 100% certainty, the explosion in daily fantasy betting that occurred since my book was written in 2012 created a large subset of coders and data analysts that are far more sophisticated than what I’m capable of.
Managing a portfolio from a capital allocation standpoint. That may seem the same as trading stocks, but it’s actually very different. One of the things I touch on in the book is how strongly I feel that bettors misuse the Kelly Criterion.
"I think measuring and predicting defensive value in baseball is the biggest market inefficiency that currently exists."
If you’ve managed a hedge fund or a mutual fund, you have a real strong feel for risk, variance and, importantly, that of the “replacement-level” asset - the S&P 500.
Running an alternative fund like baseball is an exercise in trying to find a higher expected return with the same amount of risk. That’s when you know you’ve got a viable investment vehicle, and I can assure you from looking at the books at a lot of other bettors, they have way, way too much variance.
They would need to be very logical and at the same time very creative. The great thing is, if they are curious, everything they need to build a model is in the public domain.
I actually have fiddled around with model-based betting in other sports, mostly college football, but the models aren’t mine, just the capital allocation structure. The thing about baseball though is the limited house-edge and that just doesn’t exist in other sports. Yet.
There are a lot of structural changes that need to occur in both the offshore and the bricks-and-mortar business of sports betting, for a true alternative asset class to emerge, but it will happen.
All the pieces are in place. It’s just going to take some more innovation, some of which I’ve touched on above.
Read our review of Trading Bases and learn more about Joe's story.