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William T. Ziemba
University of British Columbia
61
To determine the place payoff let P' be the amount bet to place on
horse i at track t and let P' = X,P'be track t's place pool. The payoff
per dollar bet to place on horse i at track t is
Thus, the track keeps (1 - QI)Pt and the place bets on i and j are
repaid. The remainder,the losing bets minus the track take, is then
split evenly between those who bet on i and those who bet on j. The
share for i bettors is then divided on a per-dollar-betbasis. The place
payoff on i does not depend on whetheri was firstor second but it does
depend on which horsej was the other top finisher.In a similarfashion
the payoff per dollar bet to show on horse i at track t is
1.2
1.0
06
04
02
0 l l l l l l
1/10 2/5 1/1 2/1 3/1 5/1 10/1 20/1 30/1 50/1 100/1
FIG. 1.-Expected return per dollar bet versus odds level: aggregationof
studiesinvolvingmorethan50,000races. (Source.-Ziemba andHausch 1986.)
6. Henery (1981) and Stern (1987) show that these equationscan be derived by as-
sociating with each horse an independentexponential random variable with a scale
ASSUMPTION
2. The win market is efficient, so the win odds can be
used to estimate qi.
Using these two assumptions and equations (2) and (3), Hausch,
Ziemba, and Rubinstein(1981) were able to identify horses that were
underbet to place or show. The optimal capital growth model then
determinedthe place-and-show wagers that maximized the expected
rate of growth of one's bankroll. Since the exact model is a com-
plicated nonlinearoptimizationproblemthat is difficultto solve at the
track, Hausch, Ziemba, and Rubinstein (1981) developed simple re-
gression approximationswith quite minimaldata-entryrequirements.
Their empirical studies on two seasons of racing data indicated that
significantreturnson the order of 11%were possible in the place-and-
show markets. We (Hausch and Ziemba 1985; Ziemba and Hausch
1987) extended Hausch, Ziemba, and Rubinstein's (1981) results to
provide further evidence of the place-and-show inefficiency. We
(Ziembaand Hausch 1986)and Asch and Quandt(1987)studied ineffi-
ciency of the exotic markets. Asch, Malkiel, and Quandt(1984, 1986)
investigatedwhethera drop in the odds late in the bettingperiodmight
reflect inside informationand thereby point to wagers that may have
positive expected returns. Their results suggest that this is not the
case, however. A more thorough literature survey is in Thaler and
Ziemba (1988) and Hausch and Ziemba (1990). The latter also studies
racing outside of North America.
III. Inefficiency of the Win Market and the Risk-free Hedging Model
The literaturehas demonstratedweak efficiencyof the win marketat a
single track, despite a favorite/longshotbias. To test whetherthis weak
efficiency is maintainedacross the win marketswith cross-trackbet-
ting, data were collected on several recent Triple Crown races. Al-
though cross-track betting is becoming more popular, it tends to be
restricted to major races. The best known of these are the Triple
Crown races: the Kentucky Derby at ChurchillDowns on the first
Saturday in May, the Preakness Stakes at Pimlico Race Course 2
weeks later, and the Belmont Stakes at Belmont Park 3 weeks after
that.
A simple problem is considered first. Allowing only win betting,
what is the minimumamountthat our bettor must wager to ensure the
returnof $1.00 regardlessof which horse wins the race?The solutionto
this problem is, for each horse, to identify the track that has it at the
longest odds and bet just enough to receive $1.00 if it wins. The solu-
tion involves no estimation of the horses' win probabilities. If this
parameterequal to the inverse of its win probability.Then, any orderingof the random
variablesis just the Harvilleformulas.Sternalso develops alternativeorderingformulas
using gammadistributionsthat are more accuratebut more complicated.
$ Amount of
Highest Win Return Wager That
Horse No. (on a $1 Bet) Track Will Return $1
Preakness:
1982 7 5 .0
1983 11 11 6.9
1984 10 4 .0
1985 11 7 2.5
Belmont:
1982 11 5 13.6
1983 12 9 8.5
1984 11 2 .0
1985 9 11 5.0
Kentucky Derby:
1984* 12 7 .1
1985 12 6 10.1
Average 4.7
* Cross-trackbettingon the KentuckyDerbydidnot beginuntil
1984.
n n n_
+ + P( + f=1 ) - (Pg, + Pi + PD
X-P, + P, PJ + PJ.
n
[Q(St + S) (Sik + s, )
- ? k+
3
X I( + +
k
n n n
(, e ,P + ESe)
10. This decision was not the resultof any analysisof the data. There are only a few
cross-trackraces each year and the requireddata for each race are the finaltote-board
figuresfromseveralof the racetrackspermittingthis betting.These difficultiesled to data
on only 10 races being collected, much less than would be requiredfor any analysis.
Horse
1 2 3 4 5 6 7
NOTE.-In this table, horses2, 6, and7 are Cut Away, Linkage,and Aloma'sRuler,respectively.
*Highlightedexpected returns(returnsof at least 1.10).
NOTE.-P.N. = Penn National; L.A. = Los Alamitos; Cen. = Centennial; G.G. = Golden Gate.
0 cl C)
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Golden Gate Fields in Albany, California. Using the win odds televised
from Churchill Downs, Golden Gate had six wagers with expected
returns exceeding 1.10. With a wealth of $2,500, the capital growth
model yields the optimal wagers shown in table 8.
This portfolio has four wagers totaling $820. The win bet on horse
number 10 and the place bet on horse number 2 are zero even though
they have expected returns exceeding 1.10. This is because the possi-
bility of number 2 doing well in the race is better accounted for with the
higher returning win-and-show bets on him. Also, the possibility of
number 10 doing well is better accounted for with the higher returning
place-and-show bets on him. Swale, number 10, won the 1984 Derby,
followed by Coax Me Chad and At The Threshold for a 10-12-9 finish.
Therefore, only the place-and-show bets on Swale paid off for a return
of $1,658.80 and a profit of $838.80.
Table 9 presents the results of this one-track model on the other
races. The average wagers on a race varied from $78.33 to $1,173.25
and the average profits varied from - $868.67 to $824.10. The average
of these 10 average profits was $69.97 or 9.2% on the money wagered.
Again, there is such variability in the profits that, without additional
data, no statistically significant statements can be made about positive
expected profits.
discrepancies across the tracks can allow profits, but further work is
needed to demonstrate significant profits. A simpler version of the
optimal capital growth model for one bettor at one cross track also
demonstrates the possibility of profit.
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