Are Winning Favourites Really So Bad for Bookmakers? Yes, on average.

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When you have the edge in a competition, it would seem that the rational strategy is to minimize the role of luck in determining the outcome. So if Roger Federer agrees to play one point against me at tennis, on his own serve, with a forfeit of £100,000 if he loses the point, I doubt that his optimal strategy would be to serve flat out. This would be to increase the risk that he double faults, which is by some margin my best hope of winning the point. In other words, variance is my friend but Mr. Federer’s enemy. The same would seem to apply in a horse race, where the jockey’s optimal strategy when aboard the best horse in the field is unlikely to be that of boxing himself in on the rail behind a wall of horses. When I talk about this, I like to use the example of Mick Kinane and his 2009 Prix de l’Arc de Triomphe triumph atop one of the best racehorses ever, Sea The Stars. Kinane put it like this: “I didn’t have any worries because I knew I was on the fastest horse in the race. His acceleration was fantastic.” If so, it is clear that he must have had nerves of steel, because there certainly wasn’t anyone else watching who shared that sentiment less than three furlongs out. To my mind, the horse won quite simply because he was so far superior to his rivals that he was able to overcome those obstacles which beset ordinary flesh and blood. And that includes variance! Did Kinane know that? Perhaps! Which brings us to another puzzle arising from the result of the race. Why were the bookmakers afterwards bemoaning a lost fortune on the race? According to a spokesman for Coral, for example, the success of Sea the Stars in the Arc cost bookmakers “a sizeable seven-figure sum.” It is a lament we hear so often. The bookmakers regularly decry a series of winning hot favourites. But why? If favourites are such losers in the book for the layers, why do the layers not simply shorten up the price of those particular horses or football teams or whatever, and lengthen the price of their rivals. In the case of the Arc, this would have meant cutting the odds offered about Sea the Stars by a couple of notches, or even more, and lengthening the others accordingly. Is it because the betting public would bet the same amount on the favourite regardless of the price? Unlikely! But even if true, the liability would in any case be less. So who is behaving irrationally? Is it the bookmakers or those who bet with them? And does the same apply on the betting exchanges? Anyway, do bookmakers actually lose when hot favourites win? Sometimes, but not always. The bottom line, though, is that bookmakers will on average do better when longshots win. But why? Of course, there will be fewer winners, but why is this not fully offset by the larger payouts? There are answers to this puzzle, based in the main around attitudes to risk and information misperceptions, but still no single definitive answer. That may well be because there actually is no definitive answer, but a range of them. The puzzle remains, therefore, but we are closer than ever to solving it.