Stealing Money from the Crowd

A contrarian guide to betting on horse racing. Please click on the images below for a preview:


Table of Contents:

Introduction 2

The Favorite/Longshot Bias 6

Deconstructing the Past Performances 12

Conclusion 17

19 pp.

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Thaler and Ziemba on Efficient Betting Markets & Favorite/Longshot Bias

I’ve read it before (around 2005), but not since being exposed to Thaler’s other excellent work in behavioral economics a few years back. Ziemba (Dr. Z) is, of course, a legend for his work on arbitrage in place and show pools. I’ve always believed that betting markets are mostly efficient (especially regarding public information), but that certain public cognitive bias can be exploited to find long-term value. This article explores this area.

After re-reading it again, it’s still a very worthwhile read, and a solid introduction to the field. It’s chock full of rigorous examination of much of the “folklore” (the authors’ word) of the racetrack. It’s especially useful for conclusions regarding the public’s typically sharp handicapping, finding that “the racetrack betting market is surprisingly efficient,” which cuts at most of the common claims of the mainstream handicapping literature. It does however find inefficiencies (at least at the time), especially with the well-documented “Favorite/Longshot Bias,” which generally finds pricing errors at the very top (for example, 3/5 or less) and very bottom of the odds (for example, 20/1+). In my favorite part, the authors lay out the potential reasons for the bias:

Screenshot 2014-10-02 11.44.11

Indeed, just like with other decisions, bettors are motivated by a mix of both rational and irrational motivations. I especially like the serious consideration given to the process of betting and particularly, the added utility derived, especially from longshot betting. The short time horizons of most bettors also tend to influence irrational behavior, which also explains the increased severity of the favorite/longshot bias toward the end of racing cards. The goal of the sharper bettor is to find and exploit the irrational crowd decisions, while maintaining their own rationality.

Click here for full article

Image: Rachel Kramer, 2012.

Indiana Jones & The Willingness to Be Wrong

To play the races well, you have to be willing to be wrong. And this means everything involved in losing – the loss of capital, the embarrassment, and, especially, the ego blow. The game is far too competitive to avoid good value propositions simply out of fear of feeling and looking stupid.

An interesting example of the mindset needed for risk taking comes from Indiana Jones and the Last Crusade. For those who might be unfamiliar, Indiana Jones, who is a university archeology professor with a fairly adventurous side, is about to find the Holy Grail, perhaps the greatest artifact in history. Very close to his goal and with his father’s life on the line, Indiana Jones has to pass a series of obstacles to see if he is worthy of possessing the Grail. The first two are riddles, which Indiana Jones thankfully solves just in the nick of time. But the third ordeal is different.

The scene is epic.  Here’s the clip:

He looks down at his father’s journal – and sees a scribble of person walking in the air across to the other side. But when he looks across the chasm, all he sees is air, and a terrible drop to certain doom.  The only solution is to take a step into the air – with nothing under his feet.  He has some evidence on which to base his belief — the picture in the journal – but, based on what he sees, there’s still a pretty good chance that he could fall right down into the chasm. He had to bet everything on his belief that, despite what he saw, he would not fall. He was willing to be wrong.

You need to have an unwavering belief that you will be right over time and an absolute acceptance that you may be wrong often.

Just as Indiana Jones takes a step into the air and passes the point of no return, his foot hits a bridge. Despite not being able to see it, it was there all along. It was a test of his faith, and he only passed when he was willing to take the risk. He had to be willing to be wrong in order to pass this challenge.

Betting well certainly doesn’t require religion and it doesn’t require that you put your life on the life, but it does need require strong conviction. You need to have an unwavering belief that you will be right over time and an absolute acceptance that you may be wrong often. You need to have a deep faith in your own ability and you must be willing to look silly, even foolish, in the short-term. Simply put, you need to be willing to be wrong.

It is, of course, perfectly acceptable to not like being wrong – I can’t imagine any scenario where being wrong actually feels good. But, embracing it as a possibility – even a very strong possibility based on style – is required in order to survive the long-term.

Image: Rob Young. Copyright 2008.


From the Archive: Horseplayer’s Axis of Evil (2006)

[I wrote this article back in 2006. A little dated with Bush-era terminology, but still applicable, it was the first piece on playing the races that I ever wrote. SA]

As horseplayers, we are always seeking value in our selections. Whether you’re wagering on a horse at 15-1, 4-1, 8-5, or 3-5, the ultimate goal is to find the overlay. Yet, while the overlay concept is sound in theory, it’s typically wrecked in practice by all but the most emotionally disciplined of players. This is the work of the horseplayer’s axis of evil, which gains its strength by praying on our all-too-human characteristics. Without further ado, let’s meet its membership:

(1) GREED: This first member of the axis is deceptive and devious, and, when we’re not looking, he runs off with large portions of our bankrolls. He makes us think we’re getting value when we’re really just looking to get something for nothing. Through his subtle manipulations, he throws wrenches into a well-reasoned handicapping process, and causes us to lose more money than we would simply by betting the favorite.

Greed shows up all the time in our handicapping, especially in our search for overlays. As horseplayers, we hate short prices. There’s risk in every horse race — a jockey error, a catastrophic injury — and we must be compensated for this risk. But, unfortunately, on many occasions, a disdain for short prices often clouds our judgment. We perceive negative value and move away from a horse solely because of the low anticipated payout.

(2) HOPE: Red, of The Shawshank Redemption, had it right: “Hope is a dangerous thing.” And, much like the classic handicapping quote about time and prison, when it comes to playing the races, hope is best left behind the prison walls. Yes, hope is a wonderful, inspiring feeling that makes you feel happy when things aren’t going well. It’s also something that has absolutely no place in handicapping.

Hope rears its ugly head all throughout the handicapping process, but it’s especially dangerous when you’re dissatisfied with the price you’re going to get on your top selection. You may begin to desperately look for positive things in the other horses. You’ll use words like “maybe…could…possibly.” You know the types of horses, and you’ve seen enough of them come in to convince yourself. But, unfortunately, you’ve come under the spell of hope, and started to let it guide your selections.

Overlays are great theory, but finding one in the heat of the handicapping moment can be an emotional minefield.

(3) FEAR: By far the trickiest of the members of the axis, fear subtly influences our selections in several ways. Aware of the effect of scared money and facing the fear of loss, the horseplayer must fearlessly enter a risky environment and stay brave amid tremendous uncertainty. Yet, despite our bravery, fear is not without a weapon here. For if we feign fearlessness where it is unwarranted, he attacks with the fear of regret, which guides us into situations where the risk does not equal the reward.

The player may seem confident in his selection, but will still be motivated by fear. When making this type of decision, the horseplayer’s phrases are well-known: “I’ll be devastated if I passed on this one”; “This big payday will make my day/week/month; I can’t miss it if it comes in.” (And, believe me. . . I know these phrases all too well. ) Fearful of missing the big payday, you turn a deaf ear to the important cautions in your gut.

Together, greed, hope, and fear constitute a nasty confederation that confounds the reasoning of the value-seeking horseplayer. Overlays are great theory, but finding one in the heat of the handicapping moment can, indeed, be an emotional minefield.

Scared Money & Multi-race Wagers

One reason I’m handicapping in public through this Belmont meet is to share the “inner game” of playing the races everyday. The game of betting is much more than just analytics; it is also a constant battle for self-discipline and emotional control. And this means more than not just staying strong through the lean times, but also maintaining proper perspective through the great times. In fact, this is one reason this game is so challenging, and why betting is growing more popular everyday. It not only requires analytical thought, but also strong self-discipline and constant learning.

One thing that often gets in the way is a phenomenon known as “scared money.” Essentially, it’s when you make any wager that you are afraid to lose. It’s related to “pressing,” or making bets because you really want a score right now.  In contrast, I find that when I’m playing patiently, I never expect any particular bet to hit, but I know that somewhere and sometime, the right number of bets will hit. Scared money–motivated by impatience–makes any one particular bet far more important than the long-term.

Scared money can be very deadly in in a multi-race wagers, such as the P3, P4 or P5. I find that if I am adding horses to a ticket only because I am afraid that the ticket is going to miss if I don’t, then I’m making a mistake. Even if the bet hits, it still was a bad bet. In contrast, like any set of wagers, each multi-race ticket needs to be part of a bigger long-term, value-seeking strategy.

Hindsight is always perfect, but in both making my wagers and reviewing my wagers, I always try to ask myself if I’m motivated by fear of missing the ticket, and whether adding additional horses actually adds value to the ticket. I’ll still screw up — although thankfully much less than I did when I was younger — but seeing and learning from mistakes is the key to avoiding the same pitfall in the future. But, then again, nobody said that playing the races was easy!





Trying to Not Smash the Egg

“The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” — Arnold H. Glasgow

One reason that I love wagering — whether at the racetrack, OTB, or at the sports book — is that it forces me to be emotionally-disciplined in order to succeed. You can be a brilliant analyst, but this game will eat you alive if you can’t keep your feelings in check. And, to be honest, being emotionally-disciplined is not natural for me. In fact, if I let emotion rule my betting (as I did when I was younger), I might as well just burn my money instead.

For example, it is simply not natural for me to sit on the sidelines and watch and wait. Many times, I’ll look at the card a number of times, and just not t see any plays. With potential opportunities ahead, I want to preserve my capital for bigger chances into the P3 and P5 pools. Sounds rational, so it should be easy, right? Wrong. Even though I know that it’s in my long-term interest to pass the card, the lure of betting is always strong. I know I’ll be tempted by action and, especially, the fear of missing out on an opportunity. Nothing motivates bad decisions, in betting or in life, like fear of regret.

But fear of regret is, perhaps, the worst reason to make a bet. I’ve learned through the years that the only reason to make a bet is value, and not for some sort of emotional satisfaction. Yet, like most things in this terrific game, that is so much easier said than done. I still violate this cardinal rule all the time, especially after very tough losses or very big wins. And, that’s why I love this game — it is just so freaking hard.

Wish me luck sitting on my hands, and good luck if you are playing.

Image: Mark Turnauckas, Chicken and Egg. Copyright 2011.


Recommended Book for Horseplayers: The Inner Game of Tennis

It’s a book on the surface about tennis, but it’s really about the mental side of any competitive activity. And, as most horseplayers know, it’s in this mental side of the game, where the best handicapping can come unglued. Tilt, overconfidence, self-doubt to name a few. Recommended to me by several sharp horseplayers years ago.

Links are to Better World Books and prices are typically competitive for used books. They are a leader in “Triple Bottom Line,” which means that they not only care about profit, but also planet and people. As part of their mission, Better World Books has raised an enormous amount of money for literacy and libraries, and I encourage you to check them out. I’ve used them for years — they ship quick and are reliable — and I really support their mission.

Image: Marianne Bevis, Copyright 2013.

Podcast #4: Ellis Starr

I had a great conversation with Ellis Starr, National Racing Analyst for Equibase. He can be found on Twitter @ubercapper. If you’re not following him, you should!

We talked about many things related to handicapping. Highlights include:

  • Being involved in the very early days of the internet
  • Art v. Science of Handicapping
  • Changes in the Game
  • Record-keeping
  • Value
  • Confidence v. Arrogance
  • Emotional side of the game
  • Run-outs
  • Trusting yourself
  • Lifetime learning
  • Random Events
  • Revisiting past races
  • Wagering as a science
  • Handicapping by elimination
  • Uncertainty
  • Bell Curve of decision theory
  • Representative races
  • Multi-race strategies

Click here for the podcast. 

The Generic Horseplayer Revisited

I wrote this column back in the summer of 2006.  Back then, I had been playing the races seriously for a few years and was beginning to put some central ideas to paper.  While I don’t agree with every word in it (I hope not after eight more years of playing!), the core message of the challenge of continued contrarianism remains one of the important obstacles facing horseplayers.  Enjoy!

The Generic Horseplayer

Conformity is a curious thing. In many walks of life, it is a pathway to comfort; a means to attain a predetermined level of security. If you play along, do what you’re told, obey the rules, then you’ll be taken care of – an above-average, yet cookie cutter life will exist for you. There’s almost no risk in taking the safe path; while the non-conventional person may attain or acquire more or less, conformity brings safety, although perhaps not deep satisfaction.  However, if you lean towards conformity and its resulting safety, then I’m fairly positive that you shouldn’t be expecting to profit from the horses, whether recreationally or professionally. Because in playing the horses, it’s exactly the opposite of many other aspects of life. Thinking like everyone else will not create even an average level of success. As in any speculative activity, profit can only result from an opinion that is different from the norm, so long as the difference of opinion is based on something tangible, and not merely different for difference sake.

As a devoted horseplayer, I’ve had my own experiences with the pressures of conforming. When I began handicapping, I was wildly successful, despite only using incomplete bits of knowledge based on repeated observation to reach my selections. My first big winner (35-1) was selected on a drop in class combined with a last race decent close — an analysis derived solely from watching several races mixed in with a good dose of common sense. Believing that I was probably just lucky and wishing to perpetually sustain this luck, I embarked on a journey to learn as much as I could about the game. In the following months, I read the classics of Ainsle, Beyer, Brohamer, and Quinn – and a host of other authors who all added something to the equation. In fact, as of this writing, I own and have read 47 books related to handicapping – all catalogued neatly in a veritable library of truth in my office.

After reading all these books, I was armed with an almost complete body of handicapping knowledge. However, after incorporating this information into my handicapping, I noticed a not-so-positive change in my thought processes and in my ultimate selections. I now routinely settled on favorites or other top horses, and I no longer found the less than obvious horse. I routinely supported the horses that met the proven, well-trodden angles learned from the books, such as best last race finish, top speed, top trainer and jockey, best class, and improving form cycle. At the same time, I was chanting to myself the mantras of value at every turn. Although I was acutely aware of the importance of the overlay, I would incorrectly support false overlays repeatedly. And then, one day, I realized what had happened. I had become nothing but an organization man – an unthinking disciple of a dominant ideology. Stripped down of my early individuality, I had become a generic horseplayer.

Aware of my now commonplace handicapping, I began to suspect that the success at the beginning was more than just beginner’s luck and that it contained seeds of an individualized method that I had abandoned to subscribe to the views of the orthodoxy. Determined to recapture some of the methods that had worked so well at the beginning, I began to disregard conclusions based solely on the surface of the form. In an effort not to be swayed, I would make my selections ignorant of the odds, and only bet when the public did not mirror my assessment. I tried to predict how the public would value the horses – using the knowledge that I gained in my exhaustive study of the literature – and tried to find less than obvious reasons why the public might be in error. But, mostly, I tried to unlearn what the books led me to believe – that the past performances completely reflect the possibilities of the race and that an individual race can predicted with accuracy. Indeed, I discovered that, in a speculative endeavor, the illusion of certainty can be fatal. By returning to a view that anything can happen, which I held at the beginning of my horse playing days, I recaptured the looseness of thought necessary to distinguish my thought process from the crowd.

These duel perils of extensive handicapping study – conformity and the illusion of certainty – present traps for the novice and experienced player alike. For the novice player, I would caution against too much early infusion of the technical handicapping techniques of others. Seek only to understand what a past performance means and only approach the technical works when you have the base of knowledge to critically assess them. However, anything dealing with the game that does not involve the technical part of picking winners, i.e. bet structuring, money management, or emotional control, is incredibly useful to the novice (and veteran) horseplayer. And, for the seasoned horseplayer who has read the classics and is familiar with all the established techniques, a consistent check to see if you have entered the realm of the generic is always useful. This game’s ups and downs can push all but the most emotionally disciplined handicapper into moments of doubt and towards more accepted approaches and a vain quest for certainty.

– First published July 16, 2006