Playing the Ponies, for Fun and Profit

Guest blogger Steve Walters is Professor of Economics at Loyola College in Maryland—a key fringe benefit of which, it turns out, is its proximity to Pimlico Race Track, the site of this year’s epic Preakness.

Disgusted by steroidal outfielders, felonious point guards, and sociopathic running backs? Looking for a purer, more virtuous sport to call your own?

Then allow me to make a modest proposal: spend an afternoon at your local thoroughbred racetrack.

Pure it ain’t. For one thing, there’s gambling going on—and unlike, say, football, it’s all out in the open. The athletes are also on drugs—and unlike, say, baseball, they ‘fess up right there in the program. But these days confessing your sins publicly is what passes for virtue. And at least no horse has ever lied to a grand jury, beaten his wife, or even renegotiated a contract.

Thoroughbred racing is also profoundly beautiful, intellectually challenging, and relentlessly suspenseful.

Just watching those gorgeous animals walk to the starting gate is more entertaining than half the soccer games I’ve ever attended. But seeing them break from the gate and thunder down the stretch, accelerating ‘til it seems they’re almost flying, is one of the most awe-inducing sights in sports. Hang by the rail and drink in that spectacle just once, and if you’ve got any appreciation of power and beauty you’ll say “hey, I wanna see that AGAIN.”

The intellectual challenge comes between races. Just learning how to translate the data in the racing program requires a 3-credit course at the local community college. Which is one reason attendance at racetracks is trending downward: we’ve become a nation of slackers, and we don’t want to be taken advantage of by the nerds who are actually doing their homework.
Once you know the basic code, however, the theorizing can begin. How much will carrying a couple of extra pounds hamper the favorite who won his last couple of races? Will a new jockey be able to get more out of that longshot? Or, if you prefer, your theories can be a little less sophisticated. Let’s see—Aunt Louise’s birthday is coming up, and she’ll be 89; “that’ll be $2 on an 8-9 Exacta, please.”

Thanks to pari-mutual wagering, the “theory testing” is both important and endlessly suspenseful. You don’t need a thrilling, neck-and-neck duel (like the classic finish at Saturday’s Preakness, with Curlin nipping Street Sense at the wire) to get an adrenaline rush. The favorite can be cruising down the stretch with a comfortable lead, and you might be pounding the rail in anguish over the nag that’s fading to fourth and costing you a big payoff on a Trifecta wager.

In other words, betting on the ponies is ALL ABOUT YOU. Have your theories been validated? Are you smarter than the suckers all around you? Are you, at the very least, blessed with that most valuable commodity—good luck?

Which raises an important question: Is it really possible to outsmart the other bettors at the track, or is it all a matter of chance? In economics jargon, is the market efficient, so that expected returns on almost any bet are equivalent and “normal” (and less than zero, thanks to pesky things like the tax man and the track’s share of the handle)?

As you might imagine, this is something that economists have studied a bit (though perhaps not as much as we should). For a while, we thought we had identified an inefficiency in the betting market and, therefore, a way to get rich by exploiting those suckers—or, as they are known in academic circles, “poorly informed casual bettors.”

It’s called “longshot bias.” Some studies found that if you bet on favorites, your expected returns were higher than if you bet on longshots. The explanation has to do with our preferences for risk. In a nutshell, if betting on favorites and betting on longshots yields the same average return but there’s higher variance on longshot bets, then risk-lovers (i.e., those attracted by high variance and the occasional big reward) would bet more on longshots and bid down the expected returns on such bets. In pari-mutual wagering, where the odds are set entirely by the behavior of the pool of bettors, this would push up the expected returns on favorites until betting on longshots and favorites yields the same expected utility.

In other words, persistently betting the favorite might give you a better chance of buying baby a new pair of shoes. Betting longshots pays less on average, but gives you and baby a shot at flying to Vegas for an otherwise-unaffordable weekend.

But not so fast. In a 2003 paper in Applied Economics, Russell Sobel (of West Virginia Univ.) and Travis Raines (of UNC-Chapel Hill) point out some, er, anomalies in this anomaly. It turns out that a few studies have turned up an opposite bias—over-betting on favorites and lower average returns there—that appears at odds with the “risk-lover” theory. And they think they have an explanation.

We don’t need to get into all the gory mathematical details, but Sobel and Raines (who actually studied betting on greyhound racing) think that the pattern of betting returns has a great deal to do with the level of sophistication of the bettors in attendance and their propensity to use information (or not use it). And they present some persuasive evidence on that score. For example, “longshot bias” tends to be a weekend phenomenon. Do risk-lovers only show up on weekends? Or is the weekend betting pool made up of more casual, less-informed bettors, who spread their bets more evenly over the field—perhaps because they’re using an “Aunt Louise’s age” betting theory?

Sobel and Raines present a lot more evidence in favor of their “information theory” of betting results, but one key takeaway is this: If you plan to actually make money betting the ponies, you have to pay attention to your fellow bettors as well as the ponies themselves. On days dominated by more serious, better-informed bettors, there appears to be a “favorite bias” on the simplest type of bets, especially in high-grade races. When the suckers are out in force, however, “longshot bias” will increase relative returns on the favorites.

So there you go: A day at the races has everything. Beauty, risk, reward, suspense, and even an excuse to people-watch and pass judgment on your fellow man. What’s not to like?

–Steve Walters

Posted in: Sports Econ