Optimal Online Bookmaking for Any Number of Outcomes

TL;DR

This paper introduces an optimal online bookmaking strategy that minimizes worst-case loss across any number of outcomes and rounds, using a novel dynamic programming approach linked to Hermite polynomials.

Contribution

It provides the first explicit characterization of the optimal online bookmaking strategy for any number of outcomes and rounds, connecting regret minimization with Hermite polynomials.

Findings

The optimal loss is the largest root of a simple polynomial.

The developed algorithm achieves optimal loss against an optimal gambler.

The approach unifies dynamic programming with Pareto frontier analysis in vector repeated games.

Abstract

We study the Online Bookmaking problem, where a bookmaker dynamically updates betting odds on the possible outcomes of an event. In each betting round, the bookmaker can adjust the odds based on the cumulative betting behavior of gamblers, aiming to maximize profit while mitigating potential loss. We show that for any event and any number of betting rounds, in a worst-case setting over all possible gamblers and outcome realizations, the bookmaker's optimal loss is the largest root of a simple polynomial. Our solution shows that bookmakers can be as fair as desired while avoiding financial risk, and the explicit characterization reveals an intriguing relation between the bookmaker's regret and Hermite polynomials. We develop an efficient algorithm that computes the optimal bookmaking strategy: when facing an optimal gambler, the algorithm achieves the optimal loss, and in rounds where the gambler is suboptimal, it reduces the achieved loss to the optimal opportunistic loss, a notion that is related to subgame perfect Nash equilibrium. The key technical contribution to achieve these results is an explicit characterization of the Bellman-Pareto frontier, which unifies the dynamic programming updates for Bellman's value function with the multi-criteria optimization framework of the Pareto frontier in the context of vector repeated games.