The third in David Sumpter’s list is the confidence equation. We know what it is. Suppose you get ‘h’ as the average outcome after n events (trials), and the confidence at which you can think about the validity of h becomes.
Where sigma is the standard deviation. You can divide it by n to get the confidence interval per average trial.
You can divide it by n to get the confidence interval per average trial. We know the origins of 1.96 in the equation have come from the normal distribution. Sumpter uses the terms (initially coined by Nate Silver) ‘signal’ to describe the average and ‘noise’ for the standard deviation.
Recall the betting ‘edge’ developed in the earlier post. Now, how many bets does one need to make before one can confidently say that the edge is 3%?
Reference
The Ten Equations that Rule the World: David Sumpter
