The Las Vegas odds makers are not trying to pick winners. They are trying to predict outcomes. When they are confident, they know the most likely outcome of a sporting event, they set the line to give all bettors a 50/50 chance of winning. This is called balancing the book. They are not betting against you. They are encouraging you to bet against other bettors. When everyone believes they have a 50/50 chance, they bet tens of millions of dollars with confidence. The sports book simply holds the bets and pays off the winners with the losers’ money, keeping a small percentage for the trouble. The question is, how do they predict outcomes with such accuracy?
It’s All in the Algorithm
To handicap likely outcomes, computer programs factor a vast array of “impact variables” into each sporting event and continuously crunch the numbers as new variables come to light. Finally, before kickoff, the program settles on the “most likely” outcome (the Patriots will beat the Saints by one touchdown). The line is then set at Patriots (-7) or Saints (+7), thereby leveling the playing field and giving all fans a 50/50 chance of winning. The sports book is agnostic as to the winner as long as the bettors all feel they have a fair chance of prevailing.
The Project Selection Tool
When predicting the “likely outcome” of an impending construction project, the Project Selection Tool (PST) that is found on this website functions in the same way as a sports book’s algorithm. Decades of research into the variables that impact the likelihood of a given contractor completing a given job on time and on budget was put into the formulas that drive the Project Selection Tool’s outcome predictions. The user does not have to research variables or weight their impact on the outcome. That has already been done and is built into the tool. The user need only answer a series of simple yes or no questions, and the PST takes care of the rest. This is, in fact, exactly what is happening in the background at a Vegas sports book.
Test The Tool
- We recommend that you test the tool to give you confidence in its utility. Have an experienced estimator or a hard-nosed project manager answer the yes or no questions for three projects your firm has recently completed. Test at least one project that underperformed.
- Compare the predicted outcomes with the actual outcomes.
- Then have the estimator or project manager complete the tool for a job you are considering.
- Compare the PST’s prediction of success with your own instincts and the instincts of your estimator and project manager. (The use of experienced personnel to complete the PST helps avoid the “optimism bias” that most contractors possess.)
Hedging
The Vegas odds makers are not trying to pick winners. By factoring risk variables, they are trying to predict outcomes so that they can return the odds for all bettors to 50/50 and “balance their book”. By game time, if their book is not balanced, they use a final leveling technique and “lay off” the excess side of the book (either win or lose) to a “bookie’s bookie” who in turn is balancing his book by taking bets from other sports books. Insurance companies hedge their bets in a similar manner.
Setting The Line
The Project Selection Tool does not pick projects. Because its program is preset at 50/50, when you answer the yes or no questions you are feeding the program the impact variables it needs to set the line for you. Based on the odds the PST spits out, it is up to you to decide whether you will place a bet on the project in question.
Managing Risk
When developing the Project Selection Tool, we asked ourselves these questions: How can the average contractor manage risk better? How can we select projects that match our experience and therefore offer better odds of success and profitability? Conversely, how can we avoid projects with poor odds for our company because they don’t match up with our core competencies?
Every construction contractor knows that ours is a risky business. Being able to quantify the risk hidden in each project under consideration and accurately measure the fit that is best for us is a great leap forward in the science of risk management. Take this opportunity to answer the yes or no questions in the PST, set your own line, and take the guess work out of risk assessment. Be your own bookie.
For more information on Project Selection, read more at: https://simplarfoundation.org/?s=project+selection
For a broader view on Risk Management, read more here: https://simplarfoundation.org/?s=risk+management
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
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