Archives for September 2015

Whether it is the stock market, horse racing, or Sunday’s NFL match-ups, touts and tips are plentiful.  Buy this sleeper of a stock, bet on a longshot that is sitting on a big race, or take the Bears and the points.  Email has empowered con artists among the analysts/prognosticators to leverage the math in their favor.

The bestselling book How Not to Be Wrong, the Power of Mathematical Thinking (by Jordan Ellenberg) lives up to its billing as “The Freakonomics of math” and in one chapter it addresses the math behind unsolicited mass touting of stocks and horses.

Dr. Ellenberg (Distinguished Professor, University of Wisconsin) explains the pre-Internet parable of the “Baltimore Stockbroker.”  This devious broker mails a paper newsletter to 10,240 recipients predicting that a certain stock will either rise or fall in the following week.  He sends the newsletter for 10 consecutive weeks and is correct in his prediction every week.  On the eleventh week, he asks recipients to invest money with him based on his shrewd prescience in selecting stocks to buy or short.

The odds of the Baltimore stockbroker being correct 10 weeks in a row are 1/1024 or 0.00098 (1/2 x 1/2 x 1/2 x 1/2 x 1/2  x 1/2 x 1/2 x 1/2 x 1/2 x 1/2).  How did he defy such long odds?

On week 1, he sent the newsletter to 10,240 recipients; half were told the stock would rise in the coming week and half were informed the opposite.  In week 2, the newsletter went only to the 5,120 people who got the correct prediction the previous week.  This winnowing process continued until, after the final newsletter, only 10 people were left who had received a correct prediction every time.  Some of them undoubtedly thought the stockbroker was a seer and were likely to rush to “invest.”

Dr. Ellenberg says a stunt from a British reality TV show is the closest real-world example he found of the Baltimore stockbroker parable.  Magician Derren Brown mailed sundry horse-racing selections to thousands of Britions and kept doing so until, ultimately, one person was left that believed Brown had “devised a foolproof prediction system.”  Click here for a link to a website that explains the Brown illusion in detail.

Plenty of experts are adept in picking stocks to buy and sell or horses to bet on or avoid.  None of them are likely to be mass mailing unsolicited free selections week after week and none of them are perfect in identifying winners.

In the era when newsletters went out in stamped envelopes there was a real monetary cost involved.  In the age of email, countless people can be reached at virtually no cost.  This is a modus operandi made to order for touts employing the Baltimore stockbroker scheme to provide tips on stocks or horses, or anything…in order to prey on gullible people.

Copyright © 2015 Horse Racing Business

Nominal takeout rates at various racetracks are public information.  For example, at Santa Anita, the rake on win, place, and show bets is 0.1543 and the percentage takeout on exactas is 0.2268.  Yet a published takeout rate is like the sticker price on a new automobile in that it is usually negotiable.

For example, consider an excerpt from the website of the advance deposit wagering company (ADW) OffTrackBetting.com or OTB:

“OFF TRACK BETTING is an online horse betting ADW committed to horseplayers.  Every successful horseplayer that we know is playing with a rebate, and you should be too.

A rebate is a cash reward paid on every wager you make, win or lose.  The amount of the reward will vary by track and by bet type.  OTB understands that handle is the one thing that drives this industry, and that handle is generated by its customers, the horseplayers.  By delivering daily rebates, OTB hopes to create an increase in handle leading to more revenue for race tracks, and more money that can be distributed back to horsemen in the form of purses.  In addition, by matching and surpassing current average rebate amounts offered by offshore racebooks, OTB ensures that money will go directly into the U.S. pari-mutuel pools, where it belongs.

Off Track Betting believes that we have established a very generous horse racing betting rebate program.  The more you wager, the more you make.  All horse racing betting cash rebates are placed into your OTB accounts the very next morning. “

Rebates, of course, have the net effect of reducing the cost of playing for people who bet increasingly more money with OTB.  Therefore, if 25% of OTB’s customers account for 75% of its handle and receive rebates accordingly, OTB’s nominal takeout rates are markedly misleading.  While the vast majority of OTB’s customers may be paying the published rates, the bettors whose wagers amount to the lion’s share of the handle certainly are not once rebates are factored in.

Unless one has access to a racetrack’s (or an ADW’s) historical betting data, he or she can only speculate as to what its true or weighted-average takeout rates are on different types of wagers.  Absent the data, the effects of changes in takeout rates on betting revenues, or price elasticity of demand, can’t be estimated with confidence.

When outsiders call for racetracks and ADWs to lower takeout rates, they do so without exact knowledge of what the authentic non-published blended takeout rates actually are.  Maybe it is perfectly rational for racetracks and ADWs to maintain nominal rates for rate-insensitive casual bettors and lower them for rate-sensitive large-scale bettors.  Maybe.

A key question is:  to what extent would total handle expand if nominal takeout rates were significantly decreased, over a protracted period of time, to cultivate additional participation by relatively small-scale bettors?  Perhaps racetracks and ADWs have already done extensive scientific experimentation and know the answer, but I doubt they have.

Copyright © 2015 Horse Racing Business

(Look for a follow-up article soon on a few possible mathematical relationships between takeout rates and betting revenues.)

American Pharoah’s second-place finish in the Travers provoked his owner, Ahmed Zayat, to say he was leaning toward retiring his colt immediately.  Naturally, he was emotional about the loss and later, upon reflection, changed his mind.

American Pharroah’s setback in the Travers was not unusual–the best of horses lose races.

Unlike American Pharoah, three of the twelve American Triple Crown winners (Sir Barton, Omaha, and Seattle Slew) lost their very next race after the Belmont Stakes.  Although Assault won his next start following the Belmont, he subsequently lost six races in a row before winning again.  Gallant Fox, like American Pharoah, came up short in the Travers.  Among the Triple Crown champions, only Count Fleet never raced again after the Belmont.

With respect to running American Pharoah in the Breeders’ Cup Classic, Mr. Zayat and his team should be concerned with two issues in particular.

First, American Pharoah may be on the tail end of a fitness cycle that began its ascent with his Kentucky Derby win in early May and began its descent after his Haskell win in early August.  Whether the colt can be brought back to the top of his game by the Classic is problematic.

Second, American Pharoah’s running style is not ideal for taking on older and more mature horses in the Classic at 10 furlongs, especially if a few horses press him early and often.  When Frosted shadowed American Pharoah in the Travers for most of the race, American Pharoah gamely put away his challenger but weakened late and Keen Ice was able to pass him, reminiscent of Invasor overtaking the 3-year-old Bernardini in the 2006 Breeders’ Cup Classic.

To win the Classic on Halloween night, American Pharoah will need every edge he can get.  The first step in gaining an edge–or at least not conceding one—is to transport American Pharoah to Keeneland now and let him get use to the track surface, Eastern time zone, and much cooler autumn weather–and train up to the race without another start.

Flying American Pharoah back to California after the Haskell at Monmouth Park and then weeks later flying to Saratoga for the Travers had to be detrimental.  Human athletes or even cross-country travelers know that it takes a while to acclimate to a 3-hour time difference and weather vagaries, which often affect sleep, eating habits, and one’s overall sense of well-being.

Maybe American Pharoah is good enough to train in California, travel to Keeneland the last week of October, never have a work over the racetrack, and take on some formidable upper classmen in the Classic.  But his brain trust need not take the risk.

Come Breeders’ Cup week, if American Pharoah has worked over the Keeneland racetrack for nearly two months and Hall of Famer Bob Baffert says the colt is physically fit and on his game, the Triple Crown champ should be given his chance to go out a winner.  On the other hand, if Baffert expresses reservations, the colt can be scratched and vanned the short distance to his new home at Ashford Stud.

Mr. Zayat recently said he was seriously considering sending his charge to Churchill Downs to train for the Classic. That’s a vast improvement over the California option, but Keeneland would be even better. If American Pharoah does not train in Kentucky and he loses the Classic, his connections will always wonder what might have been.

Copyright © 2015 Horse Racing Business