The Betfair Prof / Leighton Vaughan Williams / 06 April 2009 / Leave a comment

Leighton Vaughan Williams takes a look at Mon Mome's stunning win in the Grand National on Saturday and why it's important for prediction markets...

Only five winners of the Aintree Grand National have been returned at a starting price of 100 to 1. The first was Tipperary Tim in 1928, followed by Gregalach in 1929, Caughoo in 1947, Foinavon in 1967 and of course Monmore on the day before Palm Sunday, 2009.

Which of these was really the longest shot at the start? Well, a comparison of the Tote odds reveals that a bet on Mon Mome in the Tote pool would have returned you odds of about 157 to 1, compared to a staggering 444 to 1 about Foinavon and 202 to 1 Caughoo. Unfortunately, we can't extend the comparison to the first two 100 to 1 winners because horserace Tote betting didn't get going until July 2nd, 1929.

This year we have the added dimension of the Betfair SP, of course, and this returned Mon More at 142 to 1 (though a lot longer in running). Still, there's no denying that these five horses share the distinction of being honorary members of the SP 'ton-up' club.

What is it, then, about Mon More and Caughoo that distinguishes these heroes of the track from the other three? The answer is betting tax!

Introduced by Chancellor of the Exchequer, Winston Churchill, on November 1st 1926, at a rate of 2 per cent on bets made on a racecourse, and 3.5 per cent on bets in registered betting offices, the Churchill betting tax was so unpopular and ineffective that less than three years later it was gone. Between the introduction of the tax and its demise, however, two horses had won the Grand National at a returned SP of 100 to 1.

Strangely enough, Caughoo's victory marked the year that another Chancellor would decide to tinker with betting tax, as Hugh Dalton brought in a surprise tax on greyhound Tote bets and on the football pools. No matter. Backers of Caughoo were in any case returned a full 100 shillings to their shilling, and not a penny less. The first time backers of a 100 to1 Grand National winner were returned what they earned. Betting tax on horses was not to be seen again until 1966, when the Chancellor James Callaghan re-introduced it a rate of 2.5% of turnover. The dreaded turnover tax was back, just in time for Foinavon to spring his famous come-from-behind victory the following year.

It was to be another 35 years, October 6th, 2001 to be precise, before the tax on betting turnover was laid to rest and replaced with a tax on bettors' losses, known as the 'gross profits tax'. The effective incidence of the tax was significantly lower than the tax it replaced, and was not passed on to bettors. The 'Golden Age' of betting, as I have termed it, had arrived. And why was this so important for prediction markets? Because the switch from a tax on turnover (quantity) to a tax on margins (price) was critical in allowing low-margin, high-turnover, person-to-person betting exchanges like Betfair to thrive. And because the new tax regime encouraged well-informed, skilled bettors to enter, thereby creating more efficient information markets.

For these reasons, October 6th, 2001 can be seen not just as the beginning of a new Golden Age of Betting. It also marks the birth of the Golden Age of prediction markets! Note it in your diary, and celebrate!

Professor Leighton Vaughan Williams is the Director of the Political Forecasting Unit and Betting Research Unit of Nottingham Business School, Nottingham Trent University