Media Criticism #3

I read James Surowiecki’s article “The Age of Political Risk” on The Financial Page in the May 24th edition of The New Yorker. As usual I found the piece timely, informative, and accessible. I was taken aback, however, by a statement made in the fourth paragraph. Surowiecki says, “Markets work best when there’s lots of information available and a historical track record to go on; they excel at predicting things like horse races….”

If only this were true. After spending some years of my professional life teasing stories out of data, I took an interest in horse racing under just that assumption. I thought that with the proper analytical framework, the rich mine of data available in The Daily Racing Form and other sources would yield at least a modest return on investment (ROI).

As I learned more about horse racing, I came to find that even the best handicappers (those who study past performances, pedigree, track biases, etc.) correctly predict the outcome only about forty percent of the time. If by “markets” Surowiecki means the run of horseplayers generally, the answer is even more dismal. The preference of the “market” of parimutuel bettors is displayed by the final odds on the various horses in a race, with the lowest odds attached to the “favorite.” Historically “favorites” have won only about one-third of the time. More disheartening, flat bets on all favorites will inevitably produce a negative ROI over time.

In his blog entry of February 25, 2010, Steven Crist, Publisher of The Daily Racing Form wrote “…it turns out that the ancient rule of thumb that favorites win one-third of all races may need a longer thumb: In 2009, favorites in fact won 36.66 percent of the 55,984 thoroughbred races run in the United States and Canada.” Crist looked at 71 racetracks where the percentage of winning favorites ranged from a high of 42.73% to a low of 25.91%. While he did not report on ROI, I strongly suspect that it was negative in all cases of flat bets on favorites.

I would love to be found wrong, as would many who share my enthusiasm and frustration with handicapping. I invite Mr.Surowiecki to join me (my treat) to an afternoon at the racetrack of his choice. Saratoga is nice, and I have heard many good things about Del Mar, as well.