Question by Chrystalle: How do these jobs use mathematics ?
In more detail, how do they use probability ( historic ) ?
Risk Manager
Stock Broker

Best answer:

Answer by Divide By Zero
Stock broker — invests based on expected value, which in turn is based on probability. Whether/not to invest certainly depends on the probability of the stock price increasing/decreasing.

Risk manager — basically the same math as an investor except their goal isn’t to profit but to hedge against risk (ideally for free, as in the hedge should be like a fair-priced insurance that doesn’t cost money in the long run as opposed to say, warranties or auto insurance).

Bookmaker — sets the point spreads to make both sides have a 50/50 chance of winning, so that both bets have an expected value of minus the vigorish. Sets the moneylines to give both sides an expected value of minus the vigorish.

Note: a lot of people say the lines are designed to encourage even betting action on both sides so as to guarantee a profit from the vigorish. That’s not far off, given that the knowledgeable bettors make much larger wagers than the average person hence even action doesn’t necessarily mean same number of bettors on both sides. However, all the book is worried about is not exposing themselves to the sophisticated bettors, and the way to protect from that is to set accurate lines (regardless of public perception or what the unsophisticated majority of the market thinks). In the long run, accurate lines accomplish the same thing as even action, but are a safer way to achieve it because when the line is inaccurate, the action can become lopsided at any moment from the professional bettors (which would cause the bookmaker to lose money). Lopsided action from average joes is perfectly fine in the long run, but a book doesn’t want lopsided action from the “sharp” bettors.

What do you think? Answer below!

Leave a Reply

Your email address will not be published. Required fields are marked *