The Pareto Principle of Prediction

It’s common knowledge that to acquire a skill, you have to climb a learning curve. “Curve” is a good description of the process, as the acquisition of skill – like in making accurate betting predictions – isn’t linear. Read on to find out what tools you need to scale the curve and make more accurate predictions.

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The Pareto Principle – 80/20 Rule

The Pareto Principle states that 80% of outcomes come from 20% of causes. For example, 80% of supermarket revenue may come from 20% of the product lines. The idea is attributed to Italian Vilfredo Pareto, who in 1906 observed that 80% of the land in Italy was owned by 20% of the population.

The ubiquitous nature of 80/20 “Power Laws” (as they are known) even spreads to our personal lives. Try looking at likes on your Facebook posts (if you have an account). You should notice that close to 80% of your likes come from around 20% of your friends, or 80% of your mobile SMS messages come from 20% of your phone contacts.

There is nothing intrinsically special about these relative proportions; it just happens that they describe the relationships across many dimensions, including accurately predicting bets.

The issue for bettors is that to be better than the 80%, you need to put in considerably more effort. Nate Silver has described this process in relation to poker in his excellent recent book The Signal & the Noise – The Art of Science & Prediction, but it can equally applied to betting. Figure 1 simplifies the process of trying to become a more successful bettor as the relationship between accuracy of selections and the effort invested in making them.

Harvesting the low-hanging fruit

Let’s define effort to include time, analysis and resource applied to make your betting selections. Based on the Pareto Power Law, our chart suggests that with 20% effort you could match the accuracy of 80% of bettors.

At this level of effort, you’re harvesting the low hanging fruit of prediction, probably by accessing widely available information online like league tables and mainstream media reports. The effort involved in using these tools is (comparatively) minimal, and therefore most bettors will use it.

From here on, as the shape of the curve suggests, the marginal improvements in accuracy require proportionality higher effort, with this power law intensifying as you seek to move closer to the Holy Grail of 100% accuracy.

Edging along the curve – bookmaker value

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So what can you do to edge along the Pareto curve into the Effective Betting Zone (shaded in figure 1) and pull ahead of the 80% of bettors making minimal effort?

One of the most obvious – but regularly overlooked – things to do would be to invest time to understand how bookmakers work, and in-so doing understand about margins – the additional edge that bookmakers hold against bettors. This margin varies greatly from bookmaker to bookmaker, with Pinnacle Sports at one extreme (lowest margin) and most other bookmakers spreading across the spectrum with increasing margins. It is amazing how many casual punters are ignorant of this fact.

Understanding margins should be part of the process of educating yourself about the fundamental principles of betting – along with understanding expected value, different bet types and market movement – and then move on to more advanced concepts, which as the curve demonstrates, require more effort.

If you already have a background in mathematics or programming, you can leverage this to move you ahead, as you will soon require these skills as part of your journey along the curve. Some bettors may find this intimidating and decide that their interest/stakes do not warrant the effort; others will think that they can cheat the curve by relying on the efforts of  i.e. following tipsters. This is a false economy as you need skill to understand whether a tipster is worth backing in the first place (read this to know why).

Specialising to improve?

We are dealing with generalities of betting here, without specifying a sport for example, which is an important point. Attempting to be among the most accurate bettors for popular leagues like the EPL, NFL or NBA will require enormous effort as you will be competing with the best minds and sophisticated technology (changing the Power Law). And in the real world of betting this includes the bookmakers whose money you are trying to win (and visa-versa).

With this in mind you can choose to specialise in order to improve your comparative abilities. Be aware that Power Laws equally apply to sub-sets, but you may find sports or events which are less popular, and for which information is less widely available have varying Power Law relationships which may enable greater accuracy without as much effort.

Source: pinnacle.com