TAKING THE GUESSWORK OUT OF RACING’S MOST IMPORTANT ISSUE

Points of view are plentiful in the world of horse racing about the appropriate level of takeout rates on handle in order to optimize racetrack and ADW profitability. Virtually everyone agrees that pari-mutuel wagering has an uncompetitive takeout rate, as compared to alternative gambling products, but that is where the agreement ends. A wide disparity of thought exists on what are the right takeout percentages on straight bets and exotics. Most of the time, opinions are based on anecdotal evidence, or conjecture, or simple correlation, rather than on scientifically collected data put to rigorous statistical analysis.

At the December 2011 University of Arizona Symposium on Racing and Gaming, Caroline Betts, an associate professor of economics at the University of Southern California (and horse rescuer par excellent), and Steve May, vice president and business manager for the Association of Racing Commissioners International, discussed the need for controlled experimentation to estimate what handle would be at various percentage takeout rates.

These two are correct in their assessment. Dr. Betts perceptively mentioned the Laffer Curve, named for Arthur Laffer, who rose to fame as an economics adviser in the Reagan Administration. The Laffer Curve depicts that at tax rates of 0% and 100%, the federal government will receive no revenue whatsoever. At some point in between, government revenues will be maximized. Tax at too high of a rate and revenues will decline because people will not have the incentive to work harder; tax too low and government revenues will fall short of what is necessary. The same principle applies for takeout percentage and handle: too high of a takeout discourages bettors and too low of a takeout provides a profit shortfall for racetracks and ADWs.

Controlled experimentation is indeed an absolute necessity if the Laffer-like optimal takeout rate is to be determined for straight bets and exotics. While it would be a sizeable undertaking to set up the experimental design, premier consumer marketers like Procter & Gamble and McDonald’s routinely conduct market tests to ascertain how best to price (especially) new products. The main obstacle in horse racing would be to get clearance from regulatory authorities that approve takeout rates.

It is not surprising that there is almost no published scientific research on the subject of optimal takeout rates because racetracks and ADWs harbor the proprietary data. It may be that one or more racetracks have privately undertaken carefully controlled experiments to determine what happens to handle and profits at various takeout percentages, but if that is the case, the racetracks are prudently not telling. On the other hand, if a racetrack has not conducted such experiments using its vast repository of data, that is a sad commentary on its management’s lack of sophistication.

Racetracks and ADWs could get the research process started–for the benefit of the entire pari-mutuel industry–by anonymously pooling their wagering data into an information warehouse so that it could be analyzed and the findings shared among the contributors (this was the concept behind the PIMS Institute that was sponsored and supported by some of the world’s best-known companies–many of which competed with one another). But far more valuable would be to manipulate takeout percentages in real time, while controlling for extraneous sources that could effect handle. To some extent, takeout percentages are already manipulated because a rebate to a big bettor is a reduction.

Copyright © 2011 Horse Racing Business

Comments

  1. Bill, articles like this will go a long way in convincing the industry that optimal take exists and that it matters, which would be a necessary step prior to any discussion of methodology. Estimation of optimal rates will be no picnic though, especially if one admits that there is a rate of takeout where pari-mutuel wagering becomes interesting to sports bettors and other new money.

  2. The people who run the racetracks have not been very good businesspeople. Their idea has been that all you need to do is promote…little regard for customer service, pricing etc. Unless this changes, the racetracks will continue to get clobbered in the entertainment market. Their current strategy is hope…hope they get slots so they can ignore what has happened to the pari-mutuel wagering on horse racing. What you discuss in your article is right on…but way beyond the capacity of racetrack managers to understand.

  3. Yours are ACTIONABLE recommendations for racetracks. This points to a path for addressing the takeout dilemma if track management follows thru.

  4. Bill, thank you so much for writing this and your kind words about the horse rescue 🙂 The point is exactly this: as Dan mentions, only controlled experimentation allows you to explore what would to many appear to be “wild” deviations below current takeout rates – which might actually be capable of attracting back into horse racing money that fled a long time ago for alternative gaming pursuits. Historical data analysis of takeout vs revenue, where history includes yesterday, can never do that for you. Who knows when/at what takeout rates the boat sailed? The controlled experimental design methods are available to do this; as you correctly point out, cooperation with regulatory authorities – and with simulcasting and ADW “partners” – would be essential to making it feasible, however. Let’s hope someone, somewhere decides to give it a try.

  5. I don’t know why the racetracks don’t do more of what you suggest. Would be in their best interests.

  6. You’re spot on, Bill. However, there is one vitally important factor in maximizing handle that you don’t address and that is relative takeout vis a vis straight and (various) exotic wagering. It’s my belief that in order to maximize revenue more of the handle has to be channelled into straight pools and (the simpler) intra-race exotics. It’s imperative that churn be maximized. That’s achieved only by bankroll conservation, limiting jackpots, and keeping the tax man at bay.

  7. keep the peoples money tied up all day with more rolling bets real smart ,used to be 800000 in the pick three pool at sa in the 80s ,becaucse there was only one ,some one of you genuises decided why not pick three every race,and ruin it god forbid you would lower the take on exacta and tri,super to stimulate more race to race betting,na better to keep the peoples money tied up all day especially those giant rolling doubles pools,keep listening to the two dollar bettor or your marketing majors that think you are running a baseball team ,do you people honestly think if there was no gambling people would show up,like they do the ballpark?

  8. Waking up the racing world says

    This blog entry and some of those who have noted in praise only serve to underscore how FAR FROM REALITY those running the racing industry really are!!!

    The title of this entry is downright comical when contrasted with the next entry. “Racing’s most important issue” is obviously the complete alienation of 99+++% of the society which surrounds it.

    The next entry goes on to basically endorse the “dumbing down” of various moronic new-fad bets in North American racing which effectively puts the GUESSWORK back INTO “racing’s most important issue”.

    The would-be brand new customers you’re trying to attract are being asked to step blindly into an arena in which they have essentially NO CLUE how to compete.

    Standard wagering mastered long ago by the regulars all around the track ALREADY IS “GUESSWORK” for these people. Adding additional confusing GUESSWORK is NOT the answer!!!!

    And certainly to “dumb-down” the wagers so that both the novice and the long-time regular are guessing on equal terms is NOT going to appeal to the regular, because he eschews pure guesswork!!

    I spent the day at O.T.B. yesterday, surrounded only by hard-core regulars. It was repeatedly obvious throughout the day that a vast majority of their ranks HAVE NO CLUE despite their years of repetitive attendance.

    When you are dealing with a relatively small subset of subjects, with many minimally prepared in the area of common sense (and some half-drunk), your upside potential is exponential for improving your own bottom line via subtle guidance where there had previously been none. This being entirely the result of the fruits of parimutuel wagering (and the fact that revenue comes NOT from how much they lose, but from HOW MUCH THEY WAGER) (helping them to collectively do better serves your purpose by causing their bankrolls to last longer during a day, a week, a month, or a season)

    Envision a bunch of everyday attendees, some with almost no money and some with fresh Christmas green. Envision some having snuck away from their wives for the day, and imagine others playing without even knowing the benefit of past performances, for not justifying their cost.

    Imagine guys who have all known past experiences at running-up a little bankroll when at times the racing gods have smiled upon them.

    Then consider their potential when you make more of (even) THOSE (‘hard core’) people (truly) COMPETITIVE all day long, instead of their counting only piles of losing tickets which assure that their handle contribution amounts exactly to whatever they had upon walking through the door.

    Stop looking at the aorta in fruitless searches for the solutions and pay some attention to the capillaries.

    C’mon Bill, the calendar just changed from 2011 to 2012 and perhaps with it you can change to a position of acknowledging a long-overdue brainstorm which will change how horse racing is presented from the bottom up.

    (let me warn you that it won’t be easy to alter the tired, old ways of thinking that prevail today. It first came to my mind more than a decade ago!!)

Speak Your Mind

*