Wednesday, March 18, 2020

Practical Dominance (PD)

In terms of our ongoing efforts to improve the handicapping process, we can strongly assert that it is easier to evaluate a four horse race than a nine horse race (all other things being equal). Keeping in mind our strong preference for eliminating alternatives over confirming selections, we can look to the Even Swaps Method (ESM) for a useful concept called practical dominance.
  • Select specific race using WCMI.
  • For each horse in race (using past performances):
    * Evaluate each contestant's form on at most five to seven attributes. See Tsai et al, 2008, Slovic,  1973 and Do You Really Need More Information from the CIA on the positive impact of additional information on confidence (Figure 5).
    * Convert the absolute ratings on each attribute into rankings across contestants.
    * Eliminate those contestants that are either completely dominated (unlikely) or practically dominated (likely) by another entrant.
    • In the sample race below, Alpha practically dominates Charlie as his rankings are superior on all attributes except A6.
    • Foxtrot, Golf, Hotel, and Juliet are similarly dominated.
  • Consider remaining contestants as potential trades using Kelly Criterion.

As ever, if we cannot find variables that account for sufficient variance in outcomes over and above that provided by market prices then we will not have an edge and we will lose our bankroll.