Economics of Purchasing Picks

Don’t buy picks.

Not from me. And certainly not from the guy flashing stacks of cash and scantily clad women.

Even if you 100% believe your favorite tout has an edge, the economics rarely work out.

Example A

Let’s say you pay $25 for a pick from a tout who claims that his model beats -110 lines at a 55.0% clip. You believe him, pay him $25 for the pick and wager $220 on the game. Did you know that your expected return from that series of transactions is -6.4%?

Let’s work through the math. First the expected value of the bet itself is $11 as calculated below:

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However, once you factor in the cost pick ($25), the total EV drops to -$14, which gives you an expected return of -6.4% (-$14 / $220).

Breakeven Wager Amount

The fixed cost of the pick turned a winning proposition into a losing proposition. If fact, in order to breakeven with the above example, you would need to wager $500. To get to a 2.5% expected return, you would need to wager $1,000.

If you want to calculate the cost of purchasing picks into your expected return, you can use the following template.

55% Win Percentage

If your true winning percentage is 55.0%,you are an extremely good handicapper. Your wagers would have an expected return of 5.0%, which many professionals would be happy with. If you’re promised something significantly better, you should be extremely leery of this individual’s credibility.

However, it is very difficult to achieve these results in the long term. Consequently, you should approach someone’s record with certain level of skepticism. It’s important to recognize there is a chance that your favorite tout is no better than a coin flipper or his purported results are inflated. Regardless of whether the intent is malicious or not, your expectations should be discounted from what you’ve been promised.

With the tout fee calculator, we encourage you to do some sensitivity testing to understand how your expected return changes when you change some of the inputs. What if the true winning percentage is 54%? What if I bet $1,000 instead?

Big Picture

There are very few scenarios in which it makes sense to purchase picks.

1.      The model needs to be extremely good.

2.      You need to have supreme confidence/trust in the tout/model.

3.      You need the economics of the cost of the pick to make sense.

Basically, you need the stars to align. As a result, we never advise you to purchase picks from anyone.

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