RISK-TAKING BEHAVIOR

Behavioral economics, which is a hybrid between psychology and economics, has always fascinated me.  The current sell-off in the stock market got me thinking about how there are so many similarities between stock market investing and horse-race betting in terms of how participants tend to react to risks from gains and losses.

Experiments in prospect theory, which focuses on behavioral biases that lead to sub-optimal decision making, have shown that people are predisposed or hard-wired to be risk averse (prospect theory was pioneered by Nobel Laureate Daniel Kahneman and Amos Tversky).  A key finding that pertains to all forms of risk taking is that people feel more emotional pain from losses than they do emotional gratification from gains of the same amount of money.

A horse-race bettor, for example, is likely to experience more regret, a negative cognitive emotion, over a $100 losing wager than fulfillment from a $100 winning bet. Regret often leads to and reinforces risk-averse behavior.  A former neighbor of mine once told me that when he went to the local racetrack for his first and only time, he did not cash a bet.  He said he was never going back, evidently risk averse to an extreme over his lack of success in a single day of pari-mutuel wagering.

During the current stock market sell-off, I heard an investor, who is about 50 years old, say he sold most of what he owned, even though he still has substantial double-digit gains over the past five years.  Here again, the individual became risk averse and also focused on what is occurring now (the recency effect) rather than thinking rationally about his long-term returns.

On average, since 1980, there has been an annual market correction of at least 14%, so what is transpiring is normal stock market behavior (although until 2022, the S & P 500 had never declined by more than 10% to start a new year). Warren Buffett’s Berkshire Hathaway has been down 50% at least twice in its history, yet has produced phenomenal returns for investors who stayed with it through peaks and valleys.

As human beings, even the most experienced and skilled among us are subject to emotional reactions to risk-taking, whether it is betting on horses and sports or what to do with our stock portfolio.  Intellectually and empirically, we know long-term trends, but struggle to avoid making poor decisions owing to pangs of regret over losing blips.

I have to go now to find a diversion, perhaps betting a few horse races, from what is happening to my stock portfolio, so I can avoid the urge to sell, sell, sell!

Copyright © 2022 Horse Racing Business

MY FIRST EXPERIENCE WITH MOBILE SPORTS BETTING

Legal sports betting is rapidly spreading across the United States.  Currently, 30 states have legalized sports betting and 18 allow online sports betting. 

Sports betting companies were aggressively advertising on the National Football League wildcard-game telecasts this past weekend.  Likewise, social media and email advertisements were prevalent.

I live in Ohio, which has recently legalized sports wagering but it won’t be up and running until sometime later in 2022.  So, until then, to make a legal bet, I must wager in a state where sports betting is operational.  Living close to both Pennsylvania and West Virginia, that is an easy drive.

To give a try to mobile wagering, I decided to open an account with the company I am most familiar with, TwinSpires (Pennsylvania), and place a bet on the Cincinnati Bengals vs. Las Vegas Raiders NFL contest.  An Ohio resident can open an account in Pennsylvania, but must be physically present in Pennsylvania to actually make a bet.

TwinSpires is offering a variety of promotions to entice people to open an account, promotions that are virtually identical to a host of other companies such as BetMGM, DraftKings, and FanDuel.  The sports-bet offer I selected was as follows:  Bet an amount up to $1,000 and if the bet fails, TwinSpires gives the bettor a credit of that exact amount to wager within seven days.

Assume a bettor wagers $1,000.   If the bettor wins, he or she collects $930, with a 7% takeout.  On the other hand, if the bettor loses, he or she has a week to place another bet using the $1,000 credit from TwinSpires.  The bettor can cash out the winnings on the second bet ($930) but not the $1,000 that TwinSpires provided. 

I attempted to make a bet from Ohio, but, as expected, could not because the TwinSpires app tracked my location.  Once I drove about 50 miles and crossed the Pennsylvania line, I stopped at a gas station and made the bet after the app ascertained that I was actually in Pennsylvania.

Driving to Pennsylvania or West Virginia will not be necessary later this year when Ohio joins the sports-betting states.  It will be as convenient as account wagering on horse racing. 

What effect sports betting, particularly via mobile, will have on pari-mutuel handle is to be seen.  A major concern is a relatively low takeout rate on sports betting that puts horse racing at a huge competitive disadvantage.  It may not matter to casual bettors, or to horse-racing aficionados, but it will to regular bettors of large amounts, who heretofore have had only account wagering to bet legally online.

Copyright © 2022 Horse Racing Business

DECISION TIME FOR OWNERS OF BAFFERT-TRAINED TRIPLE CROWN CONTENDERS

The recent Sham Stakes for 3-year-olds at Santa Anita racetrack was won by Newgrange with Rockefeller finishing second.  Both colts are trained by Bob Baffert and neither colt earned points to enter the 2022 Kentucky Derby. Mr. Baffert has been suspended by Churchill Downs from running horses at the track through the spring meet of 2023 and hence the track won’t allocate Kentucky Derby points to any horse trained by him. The track’s ban followed the Baffert-trained Medina Spirit testing positive for a prohibited medication after winning last year’s Derby.

In addition, the New York Racing Association may prevail in its ongoing legal effort to ban Mr. Baffert from its racetracks, thereby precluding his trainees from running in the Belmont and Travers Stakes.  If NYRA does prevail, and the Churchill Downs exclusion remains in place, Baffert-trained colts will be precluded from contesting two-thirds of the Triple Crown races, as well as the prestigious Travers in August 2022.

These possibilities pose a critical and an immediate decision for the owners of Baffert-trained 3-year-old colts with Triple Crown potential.  Do they remain loyal and keep their colts with the winningest Kentucky Derby trainer ever and arguably the most accomplished trainer of all time of horses on dirt surfaces?  Or do they send their colts to another trainer so they have certain unfettered access to the most coveted races for 3-year-olds in America?

Say an owner estimates there is a 10% chance that Baffert-trained horses will be able to run in the 2022 Kentucky Derby, either because Churchill Downs relents or there is some sort of legal intervention.  Further, the owner estimates there is a 20% chance that Baffert-trained horse will be able to compete in NYRA races due to a legal victory. 

With less than four months to the Kentucky Derby and five months until the Belmont Stakes, the owner is looking at overwhelming odds against his or her colt running in the two most esteemed American races.  Specifically, the owner’s estimated odds of being able to run in both the Kentucky Derby and the Belmont Stakes are 2 percent. 

A rational actor (or an algorithm) looking at the situation strictly from a probabilistic viewpoint (i.e., not considering any feelings of loyalty toward Mr. Baffert) would conclude that the correct course of action is to change trainers and do so before his/her colt runs in a race that grants Kentucky Derby qualification points.

Copyright © 2022 Horse Racing Business