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Why was the Arc triumph of the greatest racehorse such a bad result for the bookies?

The Betfair Prof RSS / Leighton Vaughan Williams / 06 October 2009 /

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The Betfair Prof, Leighton Vaughan Williams, looks at why favourites winning is bad for the bookies...

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. Yet this is what Mick Kinane managed to achieve in Sunday's Prix de l'Arc de Triomphe atop perhaps the best racehorse ever. Kinane puts 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, he must have nerves of steel, because I doubt there was anyone else watching who shared that sentiment less than three furlongs out.

To my mind, Sea the Stars 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! Kinane is a great jockey and perhaps he knew 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 would have cost bookmakers "a sizeable seven-figure sum." It is a lament we hear so often, and more often than usual this year.

The bookmakers take a severe hit whenever they suffer 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 mean 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 bookmaker or those who bet with them? And does the same apply on the betting exchanges? There are answers to the puzzle, but for once I'd just like to pose the questions. Any thoughts?

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