Exotic Betting at the Racetrack

The following sections are included:

• Dedication
• Acknowledgements from the 1986 First Edition
• Acknowledgements for the Second Edition
• Contents
• Preface to the Second Edition

The crowd is composed of many types of bettors. Most of the people attending a day’s card, particularly on Saturdays and Sundays, do not go to the track all that frequently. They go every so often to enjoy a good day’s racing and to have an entertaining afternoon or evening. They do not expect to win but they certainly would enjoy a winning day and particularly a big exciting payoff. These bettors have many systems for their betting. Many just follow the picks in the program, the daily racing form’s consensus or from one of the tip sheets. Others study the daily racing form with great care and attempt to find overlaid horses going off at odds that are longer than they should be. Others make bets by the way the horses look in the post parade. Some base their choices on favorite numbers like seven in the seventh and names like Lucky Lucky Lucky. Some bet the same amount in every race. Others mix up their bets reserving the larger bets for the horses that look the best…

Arbitrage in its pure form is to construct a sure bet so that no matter the outcome, you either break even or turn a profit. Most observers say that arbitrage does not exist but actually it does in many instances because there are different financial markets for the same sports betting or financial security situation. This is because different people have different sets of information and beliefs. Let’s take the simplest case: either A or B wins. Let O_ah be the odds given on the event that A wins from betting source h and O_bi that for B winning from betting source i. With these UK odds, the odds are the total return per 1 unit bet. In comparison, US odds are UK odds −1 and their payoffs are US odds +1 = UK odds…

The racetrack win market is essentially efficient like the stock market. The odds on average represent closely the chance that a given horse will win. There is the favorite-longshot bias. Favorites are shunned and they return more on average than they should. Longshots on the other hand are greatly preferred by the betting public and they are heavily overbet. The bias is most extreme for the greatest favorites and the greatest longshots. There used to be modest profits that could be made by betting very extreme favorites to win but these gains were quite small — in the 2-5% range at best and only on favorites at odds of 2-5 or less and now do not exist. By adjusting the track payback by the favorite-longshot bias as in Table 1.3 the win odds can be used to estimate accurately the chance that a given horse will win a specific race. This information is a key ingredient that yields the winning systems described in this book. The systems are for exotic bets such as the exacta, quinella, daily double, triactor, superfecta Pick 3, 4, 5, 6 and place pickall and the straight bets to place and show. The reasons why we can win in these other betting markets are:

• Each of these betting pools involves a more complicated payout structure that is more difficult for the average or even expert bettor to understand and even more importantly — to evaluate properly. Many, if not most, bettors do not seem to understand how the payoffs are computed.
• The outcome of a bet in each of these pools depends on the finish in the race of at least two or possibly three or four or more horses rather than just the one as in win betting.
• In the exotic bets there are many more combinations to consider. So it is very likely that some combinations are overbet (especially since the public likes to wheel many of the improbable horses) and some are underbet. Hence there is a good chance that one or more seriously underbet opportunities will be sufficiently good to warrant betting on.
• In the place and show pools the level of betting activity is quite small and the favorite-longshot bias is even more extreme hence it is very likely that underbet place and more frequently show bets will arise that are very profitable wagers…

There are two features of a winning betting system that distinguish it from a losing system. They are: (1) a selection scheme that identifies horses sufficiently underbet for a wager to have a positive expected return; and (2) an intelligent money management scheme. It should be clear that the first feature is necessary. Consistently betting on horses that are overbet MUST lead to losses in the long run. Indeed there is no way that a money management system can be devised to turn a sequence of losing bets into a profitable situation in the long run. The previous chapters dealt with this first feature. The bad news is that there does not exist a selection scheme based simply on the win odds that has a positive expectation unless superior handicapping is involved. The good news in Chapters 6–14, however, is that there exist selection schemes for place, show and exotic bets, involving only the toteboard figures, that have positive expectation. Then superior handicapping adds to the expected gains and long run wealth. This chapter will concentrate on the second feature, an intelligent money management scheme. That is, once you have identified an underbet horse, how much should you bet?…

The cartoon here reprinted from an article about the Dr. Z place and show system in Fortune magazine, reminds us of one of the most important things to keep in mind: Do Not Bet Too Early. The systems presented in this book are based on toteboard considerations and handicapping using fundamental information and forecasting services. A bet is warranted when its payoff provides an edge of 10% or more in comparison to the fair price for the wager. A bet that is worth making with several minutes remaining may fizzle as post time nears. To be successful you must balance the chance of getting shut out by betting too late with the inaccuraries of betting too soon. Be sure to keep track of where the horses are. The betting stops when the horses enter the starting gate, not at the stated post time. Practice will tell you how long you can wait before making your bets. Positions in undesirable locations in the grandstands, clubhouse and turfclub often have the shortest or no lines. For big races, the window lines may clear out with a minute or so to go as people scramble to watch the race on TV. We have consistently been able to make bets on Kentucky Derby Day with literally fifteen seconds to go, in full view of the toteboard. Remember, once you have bet, it’s too late to turn your tickets back. Before you bet have confidence that your wagers will have a reasonable edge at the end of the betting period. The amount of the edge and the size of the pools guide you in this regard. Our experience is that the place and show pools usually are stable with about two minutes to go and the exotic pools stablize with about five minutes to go. However we cannot stress enough the wisdom of betting as late as possible. That is when the so-called smart money is bet camouflaged so as not to influence the odds much. The evidence we have is that last minute betting is very well informed…

Most bettors do not like to wager to place or show. They have been conditioned by a countless series of handicapping books pointing out that true handicappers bet to win not to place or show. Indeed the thrill and bragging rights associated with winning on an 8-1 shot are much greater than in the collection of $3.20 or $2.80 on a favorite to place or show. The feeling is that the payoffs are too small for the risks involved. For example, if you are collecting $3 payoffs you must win two-thirds of your bets just to break even. Breakage also is very heavy for place and especially for show bets. A horse that should pay $2.79 will pay only $2.60 with 10¢ breakage. This takes away about a fourth of the profits. These are all good reasons to be wary of place and show bets. However, it is possible to consistently win by betting on place and show wagers. The key, as for all of our suggested Dr. Z wagers in this book, is: 1) to know how to evaluate the worth of a bet; and 2) when the bet is such that you have a substantial edge, say of the order of 10% or more, then you wager. The size of your wager should be based on a good money management system such as the Kelly criterion which we recommend…

This chapter recalls a memorable day on November 10, 1984 when Ed Thorp and I attended, with my Vancouver colleague Bruce Fauman, the first Breeders’ Cup day at Hollywood Park. The purpose of the day in addition to fun, was to test my Dr. Z system co-developed with Donald Hausch with some early help from Mark Rubinstein. The idea of the system is simple: use the data from a simple market, in this case the win probabilities to fairly price bets in the more complex markets, such as place and show. For example, with ten horses, there are 720 possible finishes for show. Then one searches for mispriced place and show opportunities. This is a weak form violation of the efficient market hypothesis based solely on prices. How much to bet depends on how much the wager is out of whack and it is a good application of the Kelly betting system. The formulation below shows such an optimization. There is a lot of data here on all the horses and not much time at the track. So a simplified approach is suggested. Don and I solved thousands of such models with real data and estimated approximation regression equations that only involve four numbers, namely, the amounts bet to win in the total pool and the horse under consideration for a bet. Plus the total place or show pool and the place or show bet on the horse under consideration…

The exacta is the most popular bet at the racetrack that combines the results of two separate horses. Tracks have responded to this popularity by offering more and more exacta wagers. For example at Golden Gate Fields in California, there are seven exactas on each day’s card. On the 1985 Kentucky Derby card there were eight including one on the Derby itself. To win you must select the first two horses — the winner and the second place horse — in exact order. Hence the name exacta. This bet is also called the exactor or perfecta or perfector depending on the locality. It’s usually a $2 or $5 bet, although at some tracks such as those in Louisiana it can be for $3…

The quinella is easier to win than the exacta because instead of having to predict the precise one-two finish you merely have to select the top two finishers. The order of finish is immaterial. It is about twice as easy to win a particular bet in the quinella as opposed to the exacta, hence the payoffs are about half as much. Quinella bets are not as popular as exactas or triactors because they have smaller payoffs. Hence many tracks are phasing them out or minimizing their use. However, they are still used in many racetracks and serve as an exotic bet that is intermediate between the win bet and the exactor. You must select the winner and the second horse. Hence payoffs will usually but not always exceed win payoffs and will always, except for very strange betting pools, be smaller than exacta payoffs would be…

The double is won by selecting the winner in two separate races. These races historically were the first two on the day’s card. However, at most tracks, other races are used and some tracks have more than one double on a particular day’s card…

The following sections are included:

• Theory of pricing the bets
• Who is better: Shared Belief or California Chrome?

The following sections are included:

• Theory of pricing the bets
• The Pick 3 at the 2014 Belmont Stakes
• The Pick 4
• Example of Pick 4 with embedded Pick 3’s and Doubles: Travers Day at Saratoga
• Pick 4 Example with the multiple tickets approach: Opening day at Belmont Park, September 10, 2011
• The 2013 Travers
• The Pick 4: why you need to go to score 8
• The Pick 4 on the Whitney

Pick 5s are more rarely offered than Pick 3, 4 and 6 but they are making a resurgence in 2014 with a 14% track take and 50 cent tickets on the first five races of the card in California, New York and other racetracks. Beyer (2014b) points out that the P5 handle at Del Mar has been double or more that of the exacta. The Pick 5 dominates the Pick 6 which has $2 tickets and a 23.68% take up from 20.68%. The payoffs have been large too with some near $100,000 and most above $7000 per 50 cent ticket. Horse players have boycotted the higher takeouts on exotic bets. For example at Churchill Downs the higher take has lowered betting volume. Track managements still do not understand the basic economic result that higher takes lead to less volume and lower not higher track profits. Those betting with rebates get some rebate but not all of the increase…

The following sections are included:

• Theory of pricing the bets
• The one that got away: the hitable $2 million Pick 6 at the 2009 Breeders’ Cup
• A big P6 win
• The Rainbow Pick 6 at Gulfstream Park
• The Pick 6 at the Del Mar Futurity
• A Pick 6 at Del Mar

Investing in traditional financial markets has many parallels with racetrack and lottery betting and much of the analysis is similar. Behavioral anomalies such as the favorite-longshot bias and mean reversion are pervasive and also exist and are exploitable in the S&P500 and FTSE100 futures and equity puts and calls options markets, see Tompkins, Ziemba and Hodges (2008) and Ziegler and Ziemba (2015). I use this in personal and private managed accounts and in a futures fund that trades the S&P500 and Russell2000 futures and futures options. Biases there favor buying high probability favorites and selling low probability longshots just like the high probability low payoff racing wagers. But in complex low probability high payoff exotic wagers such as the Pick 6, the bias reverses to overbet the favorite so one must include other value wagers in the betting program. Fundamental information such as breeding is important as well and is especially useful for the Kentucky Derby and Belmont Stakes where horses have never run that far before…

For the 2012 Belmont Stakes, I was in Istanbul, where I taught an applied stock market course at Sabanci University each June from 2010 to 2013. There was a lot of hype going into the Belmont as I’ll Have Another had won the Kentucky Derby and Preakness piloted by an unknown 25 year old Mexican jockey Mario Gutierrez. Thoughts of a triple crown winner abounded. But in the 34 years since Affirmed won all three races in 1978, there have been seven horses that went into the Belmont with a chance to win all three classic races. They are: Spectacular Bid, Silver Charm, Sunday Silence, Smarty Jones, Charismatic, Real Quiet, and Big Brown. In addition, there were some great horses who won the last two legs but had lost the Derby such as Risen Star, Afleet Alex and Point Given…

This chapter discusses the 2014 Triple Crown races.

• The Kentucky Derby eligibles as of April 23, 2014
• The Kentucky Derby Results
• Kentucky Derby analysis
• Some Derby data
• Super Screener at the 2014 Kentucky Derby
• Super Screener at the 2014 Preakness
• Super Screener at the 2013 Belmont Stakes
• The Preakness, 2014
• The Belmont Stakes, 2014

The rules for obtaining a spot in the race with at most twenty starters are in my May 2015 column in Wilmott. Basically, most of the points needed to qualify are in the last two races prior to the Derby. Hence, horses with top two year old form but weak three year old performance will not qualify. Horses such as Lemon Drop Kid, Birdstone and Union Rags, all of whom won the Belmont stakes after poor Kentucky Derby performances would be excluded from the Derby field. Of course they could run in the Preakness and/or Belmont stakes…

Every year I study and bet on the triple crown races. We had a very good run in the 1970s, 80s, 90s into the 2000’s. Then one could use the dosage index to basically eliminate most runners in these races especially the mile and a quarter Kentucky Derby held on the first Saturday in May of the horses three year old year at Churchill Downs in Louisville, Kentucky and the Belmont Stakes mile and a half held five weeks later at Belmont Park on Long Island…

The 2015 season saw the first triple crown in 37 years when American Pharoah dominated all three triple crown races. Trainer Bob Baffert usually puts two of his horses in a race when he thinks they are equal. Going into the Kentucky Derby, Dortmund and American Pharoah were so thought of. But American Pharoah beat Dortmund and the other horses handily in the Kentucky Derby. Very often the first two finishers in the Derby are 1-2 in the Preakness as well. This was the case again. But the $1\frac{1}{2}$ mile Belmont is a different story. It is usually won by a horse with a dosage index of 3.5 or lower. Indeed, the great Sunday Silence, at 3.8, was crushed by his rival Easy Goer. As Easy Goer’s jockey Pat Day told me then and, to this day he is still convinced, that Easy Goer was the better horse even though Sunday Silence won three of their four major races together. Easy Goer won the Belmont while Sunday Silence won the Derby, the Preakness and the Breeders’ Cup Classic…

The following sections are included:

• The Kentucky Derby
• The Preakness
• The Belmont

There are many rich horse races. I was fortunate to be a minor co-owner of Honor Code who was in the 2015 $5 million Breeders’ Cup Classic. He finished third behind triple crown winner American Pharaoh earning a half million dollars. He had won the grade I Met Mile and the grade I Whitney at Saratoga (races I was able to watch live and bet on). He was named top older male dirt horse that year. He went on to stand at Lanes End for $40,000 stud fee, breeding to 145 top mares whose in foal sale prices were the second highest of all new sires behind triple crown winner American Pharoah whose stud fee is listed at $200,000. However, with his so-so pedigree, this is a high price. Rumor has it that there are discounts. After one year, he was shipped to Australia for the off Kentucky breeding season at a much reduced price of A$65,000. One wonders why? I can only think of a few top stallions that were shipped to Australia including Kentucky Derby winners Thunder Gulch and Fusaichi Pegasus. At a reputed $6 or 9 million the owners who bought him as a two year old have more than recouped their investment…

The Dubai World Cup at Meydan Racetrack is a day like the Breeders’ Cup with the best horses from around the world. Horses from the US, England, France and Japan tend to dominate. The facility and video show are spectacular. In addition to top notch racing there are many events. Before each race there is a prize for the groom of the best groomed horse. After each race, the owner, trainer and jockey receive large trophies. The grandstand is a mile long, the longest building in the world and cost $1 billion to build. The grass and dirt tracks are top notch and the whole event is a pleasure to watch and bet. This year’s event had nine races which were mostly grade I’s and all had purses of $1 million or more. The final three races were worth $6, 6 and 10 million, respectively…

In this chapter I honor the great mares of 2008-2016: Rachel Alexandra, Zenyatta, Goldikova, Treve, Beholder and Song Bird.

• Two legendary US horses
• Honoring two female horses
• Zenyatta for horse of the year honors in 2010
• Goldikova — the French Breeders Cup Mile Champion
• Treve: A superstar French filly

My first foray into racing was somewhat accidental, and at the low end. Not a good combination for any investment! Things started off beautifully, however. In September 2005, I was invited to speak to management at one of America’s great classic racetracks, Keeneland. It is a beautiful site and I have used their library for research on several occasions. I spent three hours covering key issues facing the industry in the US, including rebating, betting exchanges, and demand elasticity. I felt like the talk gave senior management plenty of food for thought, and a lively discussion ensued…

Horse breeding, racing and top quality wine production go hand in hand. I was fortunate to visit the stables of Frederico Tesio, an Italian breeder, trainer and co-owner of perhaps the world’s greatest collection of race horses ever. Tesio was born in Turin on January 17, 1869 and died at 85 on May 1, 1954. He was orphaned at six and graduated from the University of Florence…

The following sections are included:

• Bibliography
• Index