Chapter 38 Exercises: Risk Management and Responsible Gambling

Instructions: Complete all exercises in the parts assigned by your instructor. Written responses should demonstrate clear reasoning with concrete examples. Programming exercises require type hints, docstrings, and working sample output. Risk management exercises should prioritize safety and conservatism over profit maximization.

Part A: Loss Limits and Stop-Losses

Each problem is worth 5 points. Answer in complete sentences.

Exercise A.1 --- Loss Limit Calibration

A bettor has a $25,000 bankroll, typically places 6 bets per day at 2% of bankroll each, and has a verified 3% edge on -110 lines. Calculate appropriate daily, weekly, and monthly loss limits (in both dollar amounts and percentages). Show your reasoning for each time horizon. Explain why the weekly limit should not simply be 7 times the daily limit.

Exercise A.2 --- Hard Stop vs. Soft Stop Design

Design a two-tier loss limit system for the bettor in Exercise A.1. Specify: (a) the soft stop threshold and what actions it triggers, (b) the hard stop threshold and how it is enforced, (c) the resumption criteria after each type of stop, and (d) why the gap between the soft and hard stop matters psychologically. Provide the specific dollar amounts and explain each choice.

Exercise A.3 --- Dynamic Limit Recalculation

A bettor starts a month with a $20,000 bankroll and 4% daily loss limit ($800). After a bad week, their bankroll drops to $16,000. Explain two approaches to recalculating the daily limit: (a) recalculate based on current bankroll ($640), and (b) keep the original dollar amount ($800). Analyze the advantages and risks of each approach. Which do you recommend and why?

Exercise A.4 --- Loss Limit Override Analysis

In Case Study 2 of this chapter, the bettor overrides their daily loss limit because they identified a "+4% edge bet" after the limit was hit. Formalize this decision using expected value. If the bet has a 4% edge and the stake is $3,000, calculate the EV of the bet. Then calculate the expected cost of the override assuming a 25% probability that the override leads to tilt behavior with an expected additional loss of $8,000. Compare the two values and explain why the override was a negative expected value decision despite the individual bet having positive expected value.

Exercise A.5 --- Loss Limit Stress Testing

Write a simulation that stress-tests a loss limit system. The simulation should: (a) generate 10,000 one-month periods of betting with a true 3% edge on -110 lines, flat 2% staking, 7 bets per day, (b) apply daily (4%), weekly (10%), and monthly (20%) loss limits, (c) measure how often each limit is triggered, and (d) calculate the amount of expected profit sacrificed by the limits versus the amount of excess loss prevented. Discuss the trade-off.

Exercise A.6 --- Concurrent Exposure Limits

A bettor has 8 pending bets totaling $4,800 against a $20,000 bankroll (24% exposure). Their daily loss limit is $800 but they have lost nothing today. Explain why the loss limit alone is insufficient to protect this bettor. Design a concurrent exposure limit system that accounts for both realized losses and unrealized risk. What maximum concurrent exposure percentage would you recommend?

Part B: Self-Exclusion and Cooling-Off Periods

Each problem is worth 5 points.

Exercise B.1 --- Cooling-Off Protocol Design

Design a complete cooling-off protocol for a bettor who has hit their monthly loss limit. The protocol should specify: duration, access removal steps, activities during the break, resumption criteria (at least four specific conditions), and a gradual return-to-betting plan. Explain why each component is necessary.

Exercise B.2 --- Self-Exclusion Decision Framework

Create a decision tree that helps a bettor determine whether they need: (a) a voluntary 48-hour cooling-off period, (b) a one-week break, (c) a one-month break, or (d) formal self-exclusion. The decision tree should include at least eight decision nodes based on observable behavioral and financial indicators. Draw the tree and explain the logic at each branch.

Exercise B.3 --- Seasonal Break Planning

An NFL bettor's season runs from September through February (Super Bowl). Design a structured off-season plan covering March through August that prevents the bettor from: (a) betting on unfamiliar sports to fill the void, (b) losing the analytical skills built during the season, and (c) neglecting system maintenance and improvement. The plan should include specific monthly activities and milestones.

Exercise B.4 --- Technology-Assisted Break Enforcement

A bettor decides to take a two-week cooling-off period but does not trust their own willpower. Describe a comprehensive technology-assisted enforcement plan including: app deletion procedures, website blocking tools, account deposit limit changes, accountability partner notifications, and device restrictions. Rate each measure on a scale of 1-5 for effectiveness and explain the rating.

Exercise B.5 --- Break Impact Analysis

A bettor takes a one-week mandatory break after hitting their weekly loss limit. They are concerned about "missed opportunities" during the break. Using the concepts from Chapter 4 (Kelly Criterion) and Chapter 38, calculate the expected cost of missing one week of betting (assuming 7 bets/day, $200/bet, 3% edge) versus the expected benefit of the break (assuming a 15% probability of tilt-related losses of $5,000 without the break). Which dominates?

Exercise B.6 --- Accountability Partner System

Design a complete accountability partner system for a professional bettor. Specify: (a) the partner's qualifications and selection criteria, (b) the specific information shared and not shared, (c) the communication protocol (frequency, triggers, format), (d) the partner's authority (what can they require?), and (e) the boundaries of the relationship. Address the potential for the system to become either too permissive or too restrictive.

Exercise B.7 --- Return-to-Betting Assessment

Create a formal "return-to-betting readiness assessment" that a bettor must complete after a cooling-off period of one month or longer. The assessment should include: (a) financial health checks, (b) emotional readiness questions, (c) system readiness verification, (d) a reduced-stakes plan for the first two weeks, and (e) criteria for escalating back to full operations. Provide the specific questions and scoring rubric.

Part C: Problem Gambling Recognition and Ethics

Each problem is worth 10 points. These require both written analysis and, where indicated, code.

Exercise C.1 --- PGSI Self-Assessment Tool

Write a Python program that implements the Problem Gambling Severity Index (PGSI) as an interactive self-assessment tool. The program should: (a) present each of the nine PGSI questions, (b) accept responses on the 0-3 scale, (c) compute the total score, (d) classify the result (non-problem, low risk, moderate risk, problem gambling), (e) provide appropriate guidance for each classification level, and (f) store results with timestamps for longitudinal tracking.

Exercise C.2 --- Behavioral Warning Sign Detector

Write a Python class that monitors betting journal data for behavioral warning signs of problem gambling. The detector should check for at least eight specific indicators including: increasing bet sizes, increasing frequency, betting outside normal hours, betting on unmodeled markets, declining emotional state ratings, increasing loss-chasing behavior, decreasing reasoning quality, and time between consecutive bets shrinking. Generate a risk score from 0-100 and classify into green/yellow/red zones.

Exercise C.3 --- Ethical Scenario Analysis

Analyze the following three scenarios. For each, identify the ethical issues, the relevant legal considerations, and the recommended course of action:

Scenario 1: A bettor discovers through a friend who works at a professional sports team that a star player has a torn ACL that will not be announced until tomorrow morning.

Scenario 2: A bettor notices consistently suspicious line movements in a lower-tier European basketball league, suggesting potential match fixing. They have been profiting from these movements.

Scenario 3: A bettor with a verified profitable track record starts a paid picks service. They realize their actual edge is only 2% (barely above vig), but they market their service as "70% winners."

Exercise C.4 --- Professional vs. Problem Gambling Audit

Design a quarterly self-audit that helps a bettor honestly assess whether their betting activity is healthy. The audit should cover five domains: financial health (betting and overall), relationship impact, psychological wellbeing, time allocation, and behavioral control. For each domain, provide three specific questions, a scoring system, and interpretation guidelines. The scoring system should flag concerning patterns even in profitable bettors.

Exercise C.5 --- Harm Minimization Framework

Design a comprehensive harm minimization framework for a bettor who recognizes they are in the "at-risk" category on the gambling behavior spectrum (Section 38.3.1) but does not want to stop betting entirely. The framework should include: reduced activity protocols, enhanced monitoring, mandatory check-ins, financial safeguards, and escalation triggers. Explain why this approach is appropriate for at-risk bettors but not for those already experiencing gambling disorder.

Part D: Regulatory Compliance and Tax

Each problem is worth 7 points.

Exercise D.1 --- US Tax Calculation

A US-based bettor in New York state had the following annual results: total wagers placed: $480,000, total winning payouts: $510,000 (net gambling income: $30,000), data subscriptions and software: $2,400, home office expense: $1,800. Calculate their federal tax liability under two scenarios: (a) reporting as a recreational gambler (Schedule 1 income, Schedule A itemized deductions), and (b) reporting as a professional gambler (Schedule C). Assume a 24% marginal federal rate, 8.82% NY state rate, and that the bettor's total income places them above the standard deduction threshold. Discuss which status is more favorable and the risks of each.

Exercise D.2 --- Multi-Jurisdiction Tax Planning

A bettor holds accounts at sportsbooks in three US states (New Jersey, Pennsylvania, and Colorado) and also bets on a UK-based exchange (Betfair). They are a US tax resident. Describe the tax implications of this arrangement: Which jurisdictions require reporting? How are Betfair winnings treated for US tax purposes? Are there any double taxation concerns? What records must they maintain for each jurisdiction?

Exercise D.3 --- Record-Keeping for Tax Compliance

The IRS audits a bettor and requests documentation of their gambling losses for deduction purposes. The bettor has a comprehensive betting journal (from Chapter 37) but did not keep bank statements or sportsbook account statements. Explain: (a) whether the journal alone satisfies the IRS documentation requirements, (b) what additional records the IRS typically expects, (c) what the consequences are of inadequate documentation, and (d) design a record-keeping system that would survive an audit.

Exercise D.4 --- Terms of Service Compliance Analysis

A profitable bettor has had accounts limited at three major sportsbooks. They are considering: (a) opening accounts at new sportsbooks under their own name, (b) asking a friend to open accounts on their behalf, and (c) using a betting exchange instead. Analyze each option from legal, ethical, and ToS compliance perspectives. Which options are permissible and which cross ethical or legal lines?

Exercise D.5 --- Australian Tax Classification Analysis

An Australian bettor has the following profile: $80,000 salary from full-time employment, places 400 bets per year on AFL and NRL, uses a custom model with systematic approach, maintains comprehensive records, has been profitable for 3 years ($15,000/year average). Analyze whether the ATO would likely classify this person as a recreational or professional gambler. Identify the specific factors that push toward each classification and recommend a course of action.

Part E: Synthesis and Application

Each problem is worth 5 points.

Exercise E.1 --- Complete Risk Management Operating Manual

Write a two-page risk management section for a bettor's operating manual. The section should cover: loss limits (all three time horizons with specific numbers based on a $15,000 bankroll), cooling-off triggers and protocol, self-assessment schedule, ethical guidelines, tax compliance procedures, and emergency contact information for problem gambling resources.

Exercise E.2 --- Cost-Benefit Analysis of Risk Management

A bettor argues that loss limits, mandatory breaks, and self-assessments reduce their expected profit by preventing them from betting during valid opportunities. Construct a formal cost-benefit analysis that quantifies: (a) the expected profit sacrificed by each risk management measure, (b) the expected loss prevented by each measure, and (c) the non-financial benefits (psychological stability, relationship health, career sustainability). Use concrete numbers for a bettor with a $20,000 bankroll and 3% edge.

Exercise E.3 --- Cross-Chapter Risk Integration

Write an essay (400-600 words) explaining how risk management (Chapter 38) relates to bankroll management (Chapter 4), psychological resilience (Chapter 36), and discipline systems (Chapter 37). Describe the specific failure modes that occur when one of these four pillars is missing. Use at least one concrete example from the case studies.

Exercise E.4 --- Risk Management for Teams

A betting syndicate of three people shares a $100,000 bankroll. Each member specializes in a different sport and places bets independently. Design a risk management framework for this team that addresses: individual loss limits, team-level exposure limits, intra-team accountability, decision authority, and conflict resolution when risk management and betting opportunities conflict.

Exercise E.5 --- Long-Term Sustainability Assessment

Design a "sustainability scorecard" that a bettor completes annually to assess the long-term viability of their betting career. The scorecard should cover: financial metrics (profitability, bankroll growth, income stability), personal metrics (relationship health, physical health, mental health, time satisfaction), operational metrics (system reliability, account access, edge stability), and regulatory metrics (tax compliance, ToS compliance). Provide the specific items, scoring system, and interpretation guidelines. Include specific thresholds that should trigger a serious reconsideration of whether to continue betting.