Nate Oliver's blog

As March Madness kicks in, this seems like a good time to discuss how to deal with trash-talkers, and make a few friendly bets. After-all, cash-exchange is the ultimate form of trash-talking.

Here's an example of something I did a while ago, during the Eagles vs. Patriots Superbowl game, in 2005. This is actually a good conceptual example of creating a hedged position, or a Financial Butterfly, given you're handed this, Vegas won't give you this.

Two things are required to make this work:

1. Pick the actual winner
2. Find insane people who bet with their hearts (versus statistical probability)

#1 is easy, Pats. Everyone, including Vegas, was in on this, except people falling into category #2. And note, point-spreads are actually important! The Vegas spread was 7 points, IIRC...

Position 1:
Person A simply likes to argue with me, if I say Pats, he says Eagles; I get $10 on the Pats, no point-spread.

Position 2:
Person B simply likes to take a position similar to Person A's with no real insight as to what she's getting herself into; I take the Pats for $5, no point-spread.

Position 3 (The Hedge):
The most interesting position, and the real beauty of this operation, comes into play, right here.

Person C comes running up to me, really late in the evening, and declares "I want to bet!" I said "Fine, I'll take the Patriots." He says "No, I want the Patriots." I says "How bad do you want 'em? I'll take the Eagles, with a 21 point-spread." (which is ridiculous, but the trick is to keep a straight face) - He says "2 touchdowns and I win." I says "Fine, I'll take the Eagles, 13.5 point-spread." So, I have $10 on the Eagles, with a 13.5 point-spread.

At this point I'm laughing my butt off at the bar, having realized what I have just done. And no one seems to get it, except me, I tried explaining this to Person D and Person E, but they weren't computing…

Sounds crazy right? I have $15 on the Patriots, and $10 on the Eagles? I'm betting on both teams? Not exactly. There are only three possible outcomes at this point:

1. Pats win by 2 touchdowns or more, I win $5
2. Pats win by less than 2 touchdowns, I win $25 (this is the bet)
3. Eagles win, I lose $5

I want the Patriots to win, in a tight game. I've basically purchased [free] insurance. I've placed $25 worth of bets and at this point, I have an upside of $25 and a capped downside of $5, and it didn't cost me a dime!

Basically, I know the following:

The Patriots should win, and they should win by less than 1 touchdown and 2 field goals, which is still a winner for me, at which point I win all of my positions - even while betting on both teams.

So, as the game is coming to a close, my buddy clicks in on what I have done (as he watches me cheer for both sides) and asks "Why would you not do that all the time?" My answer "Upside with capped downside on a bet I really, really like; I would do that all the time."

No Spreadsheets involved, other than in my head. Patriots won by less than 2 touchdowns - ding, ding, ding.