RACETRACK BETTING-AN EXAMPLE OF A MARKET WITH EFFICIENT ARBI"R4GE

Jay R. Ritter'

College of Commerce and Business Administration

University of Illinois at Urbana-Champaign
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Abstract. A model of racetrack betting behavior is set forward, and its implications tested,albeit with
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a small sample size. The model is consistent with risk-loving on the part of bettors. A simple betting
rule [essentially a crude version of the Dr. Z system, describd by Ziemba and Hausch (1984)] is then
tested, with evidence put forward that an unexploited profit opportunity may exist. When uncertainty is
introduced, however, it is found that the profits vanish, a result consistent with the joint hypothesis of
market efficiency and the model of betting behavior described in the paper.

Can an intelligent bettor make money at a harness horse racetrack? Do bettors allow profitable
bets to go unbet? Do all bets have the same (negative) expected return? Or, do expected returns differ
between bets, although none are profitable? Using academic finance terminology, are there violations
of a joint hypothesis of an efficient market and a plausible model of betting behavior? This paper will
investigate the opportunities available to the casual bettor at hamess horse racetracks.
One possible model of betting behavior would be that all bets have the same (negative, due to
the "loading fee" that accrua to the track and state) expected return. Based upon the evidence
presented by Mukhtar Ali in a 1977 paper in the Journal of Political Economv, this model can easily be
rejected. Ali found that harness horse racetrack bettors consistently earn a lower average return in
betting on horses with low objective probabilities of Winning than they do in betting on the favorite.
He concluded that bettors are risk-lovers, where risk is synonymous with the variance of return on a
bet. Presumably individual bets have no covariance with anything else, so that all "systematicrisk, " in
the traditional finance sense, can be diversified away.
A testable implicationof Ali's risk-loving hypothesis is that the safest bets of all should have
the highest expected payoff among all the possible bets. The safest bet is betting on the favorite to
show. Only slightly more risky is betting on the favorite to place. This implicationwas tested using
data from hamess horse racetracks in Illinois.
The results, for a $1 bet, of betting on the favorite to win, place, or show are contained in
Table 1. The favorite is defined as that horse in a race which has the greatest dollar amount bet on it
to win, and may not conrespond to the horse with the highest objective probability of Winning. Using
Ali's terminology, the favorite defined here is the subjective favorite.

'The author wishes to thank Mukhtar M. Ali, Melanie L. Lau, and Ronald Michener for helpful
comments on an earlier draft of this paper. Thanks are due to Chuck Waller of American Totalisator
Company for providing the data. This paper was originally written in 1978, while the author was a
graduate student at the University of Chicago. Changes made by the author in 1993 are included in
brackets 0.

43 1
 432 J. R. R I P E R

Table 1

Results from Betting on the Favorite to Win, Place, or Show

Bet Average Net Gain, $ Standard Deviation of Average Gain, $

Win (0.18) 0.08

Place (0.06) 0.06

Show (0.09) 0.05

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N = 229 races, composed of 134 races at Sportsman's Park during 1977 and of 95 raw at Hawthorne
Park during 1978. It should be noted that the last race of the day is unrepre-sented in the sample, so
that the average net gains reported here have a downward bias. This is because bettors have a strong
tendency to "plunge" on long shots in the last race of the day. See McGlothIin for support for these
asSertiOnS.

Betting odds are determined by the public-the bettors are betting against themselves, with the
state and the track each receiving a specified percentage commission, or "takeout," of the betting
dollars. This takeout, which in Illinois averages approximately 18 percent on win betting, is apalogous
to the "loading fee" that risk-averse individualspay when they buy insurance.
As can be seen in Table 1, the average return is higher (less negative) for betting on the
favorite to place or show than for the average bet, where the expected return is equal to the takeout,
which we shall denote as a. This is consistent with the hypothesis that bettors are risk lovers. The
presence of a large a,however, allows the existence of risk-loving behavior, with all expected returns
still being non-positive.
Given that one would expect at least some bettors (or potential bettors) to compete away any
positive expected return, the model of betting behavior set forward here is as follows: while the
expected return on any bet may vary with the risk involved, all bets have non-positive expected returns.
This has the following testable implication: no betting rule exists which generates a positive expected
return.
Since the extremely simple strategy of betting on the favorite to place or show yields only a
small negative rehun, it may be possible that some bettors do consistently earn a positive return. At
least some professional racetrack bettors appear to earn a positive return betting on specific horses.
Presumably, there are a fairly large number of amateur bettors who bet essentially at random. If this
random betting is not fully arbitraged, it may be possible for even the "casual"bettor to earn a positive
return. A "4" bettor would be an individual who only uses a small subset of the publicly available
information in making betting decisions, such as only the information flashed on the tote board at the
racetrack before each race.'
For a horse with a given objective probability of winning, the less the amount bet on it as a
fraction of the total amount bet on all of the horses, the higher the dollar return if it does pay off. The
payoff to a $1 bet on horse h, q,is determined according to the formula

'The t o t e board c o n t a i n s t h e c u r r e n t win odds and t h e b e t t i n g

t o t a l s f o r h o r s e s i n t h e race on which b e t t i n g is c u r r e n t l y o c c u r r i n g .
 A MARKET WITH EFFICIENT ARBITRAGE 433

where P is the appropriate betting pool: a is the track takeout,' X, is the dollar amount bet on
horse h for the specific type of bet that the pool applies to, n is the number of horses that pay off, i is
n
the order of finish, and Xi is the total dollar amount bet on the horses that pay off. For the win
return, n would be 1 and the numerator would reduce to P(1-a). For the place and show payoffs,
where n would be 2 and 3, respectively, the returns are conditional upon what other horse or horses
pay off. xh is equal to 1 plus the odds when n = 1 (i.e., for the win pool).
Equation (1) describes the return, for a given type of bet, on a horse that pays off. We can
now put some substance into the necessary and sufficient condition for a bet to have a positive expected
net return: the return on a bet that does pay off,x++,multiplied by the probability &hat it will pay off,
rh,must exceed unity. We want to see if there are any betting strategies for which x,rh > 1. If there
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are, we can reject the joint hypothesis that we have correctly specified a model of betting behavior and
that the betting market is informationally efficient. Before we can test this joint hypothesis, however,
we need a proxy for rw
Let fu be the fraction of the j* betting pool bet on horse h, with j = w.p, or s depending upon
whether we are dealing with the win, place, or show pools. In general, fh, # fb # fb.
Consequently, it may be possible to use a function of fb as a proxy for xh for place and show betting.
It should be noted that while the betting is in progress, the curreat values of the fk's are publicly
available, since the current betting totals are available on the tote board. Support for the conjecture
about the utility of using fk as a proxy for r, comes from the fact that at some tracks as much as
70 percent of all the win, place, and show betting is in the win pool. In addition, most professional
bettors concentrate on the win betting, so that fk is likely to be close to the true T ~ Hence,
. although
hardly a sufficient statistic, one would expect that fh would be a better indicator of a horse's objective
probability of paying off, T,, than f* or fb.
In reality, only one function of fh, and fk, and only one function of fb. and fh, have been
analyzed. The simple linear function analyzed, with the optimal parameter value included, is the basis
for the following simple betting rule:
w o r e precise versions of this rule are contained in Ziemba and Hausch's Beat the Racetrack.]
m:Ignoring long shots,bet on horse h to place if f, ,
f
5 0.7 , and bet on horse h to
sfiow if 'f, i 0.7.
fh"

'A betting pool is the total dollar amount bet on all horses for a
specific type of bet, such as a place bet. It should be noted that the
relevant betting pool for the win odds is the total amount bet on horses
to win only. The place pool and the show pool do not affect the win
odds. A similar statement is true for the place and show odds.

'The takeout is actually composed of two parts, the take and the
breakage. The take is a fixed percentage, such as 16 percent, while the
breakage is composed of residuals due to the fact that xh is rounded
down to the nearest lower dime, subject to the constraint that x, is
always greater than one. On average, the breakage is about 2 percent
for win betting, so that a is approximately 18 percent. Because the
breakage is almost certainly higher for place and show betting, a is
likely to be higher than 0.18 for place and show betting. The exact
formulation has been used in the empirical section, although the step
function described here is not as amenable t o the calculus as the
continuous x, assumed in the theoretical sections.
 434 J. R. RITTER

Since there is strong evidence in Ali's paper that there are, on average, large negative returns
on long shots, horses with fh < 0.15 were excluded from betting consideration. The 0.15 cutoff is
arbitrary; no attempt has been made to find the optimal definition of "long shot."
To operationalize and test this simple betting rule, it was assumed that the fb's-the raw data
for which are reported on the tote board at the track and constantly updated until the race starts-are
constant during the last few minutes of betting. This is the assumption made by Ali. In reality, they
are not constant but they are highly autocorrelated. This assumption is crucial for the implementation
of the simple betting rule as a profitable betting rule, and will be discussed further below. All other
information available about the horses and jockeys has not been taken into account-only a small subset
of the publicly available information is being used.
The 0.7 parameter in the rule was determined by calculating the net returns using different
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cutoff numbers. The net return was at a maximum when the cutoff was 0.7, based upon the sample of
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134 races at Sportsman's Park referred to above.' The results of applying this simple betting rule are
listed in Table 2, and the results of using other cutoff values than 0.7, not necessarily the same for both
place and show betting, are described in the Appendix.

Table 2

Results of Implementing Simple Betting Rule Using 0.7 Cutoff

Place Show

No. of Actual Bets 9 65

Average Gain per Dollar Bet 0.47 0.17

S.D. of Average Gain, $ 0.31 0.08

N = 134 races at Sportsman's Park during 1977.

Since the value of the optimal cutoff ratio (0.7) was determined from the data, "t-statistics"
computed by dividing the average gain per dollar bet by the standard deviation of the average gain
would be difficult to interpret. Consequently, a second sample composed of 95 hamess horse races at
Hawthorne Park in February, 1978, was analyzed, with the results in agreement with the profitability
of the simple betting rule. The results of applying the simple betting rule to this independent sample,
with the 0.7 cutoff, are contained in Table 3.

' P o s i t i v e r e t u r n s w e r e a l s o found u s i n g any parameter v a l u e less

t h a n 0 . 7 5 f o r b o t h t h e p l a c e and show b e t t i n g . Below 0 . 7 , t h e lower t h e
parameter v a l u e , t h e h i g h e r t h e average r e t u r n , but t h e l o w e r t h e t o t a l
r e t u r n , s i n c e w i t h a more r e s t r i c t i v e b e t t i n g r u l e , f e w e r p r o f i t a b l e
b e t s would b e made.
 A MARKET WITH EFFICIENT ARBITRAGE 435

Table 3

Results of Implementing Simple Betting Rule, Independent Sample

Place Show

No. of Actual Bets 11 55

Average Gain per Dollar Bet 0.05 0.15

S.D. of Average Gain, $ 0.37 0.14

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N = 95 races at Hawthorne Park during 1978. Cutoff value used was 0.7.

Table 4 contains the combined sample of all races.

Table 4

Results of Implementing Simple Betting Rule, Combined Sample

Place Show

No. of Actual Bets 20 120

Average Gain per Dollar Bet 0.24 0.16

S.D. of Average Gain, $ 0.24 0.08

N = 95 races at Hawthorne Park during 1978. Cutoff value used was 0.7.

In interpreting the "t-statistics" formed by taking the average net gain per dollar bet and
dividing it by the sample standard deviation of the average gain, it should be kept in mind that the
sample distributions are highly non-normal,discrete, and asymmetric. For example, for the show
betting results in Table 4, approximately one-third of the mass of the sample probability mass function
is concentrated on zero, with the non-zero mass approximating a Poisson distribution from $2.20 on
up. In addition, the variance of rehim on the initial sample is substantially less than that of the
independent sample. This is the muon why the standard deviation of the average net gain for show
betting in Table 4 (S.D. = 0.08) does not decrease from its value of 0.08 in Table 2, in spite of the
number of bets increasing by more than 80 percent, from 65 to 120. Part of the reason for the larger
variance in the independent sample may be that the betting pools are smaller, so that more "noise" is
present.
Although the sample sizes upon which Tables 2, 3 and 4 are based are quite small, there is an
indication of a profit opportunity at the track. If, for show betting, the 0.16 net return per dollar bet
could occur on a $lO,OOO bet, this would indicate a very substantial profit opportunity. Is a profitable
310,OOO bet possible?
Since the odds are affected by the size of the bet made on a horse, the optimal bet size must
be computed. If the odds were not endogenous, then the optimal bet size for a risk-neutral bettor
would be either zero or infinity. Given the endogeneity, however, there is a finite optimal bet size.
 436 J. R. RITTER

The optimal bet size maximinx the net dollar return, which is equal to B(q~,,-l), where B is
the dollar bet size, xh is the payoff to a $1 bet on horse h. and T,, is the (objective} probability of a
horse paying off. x, is a function of B, according to equation (1). since P is equal to the total dollar
bet on all horses by the other bettors, Po.plus B, and X t for the horse to be bet on is equal to
Xh', + B. It should be noted that Xt0 - Xh, for one i, if a successful horse is bet upon, where Xh is
the horse being bet on. Consequently, equation (1) can be expressed as

1
n
(P,+B) ( 1 - a ) - c xt0 -
a .
B + x, + B (2)
xh - xho
1-1
+
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Multiplying both sides of equation (2) by Brh and subtracting B from both sides, the left side becomes
. ' ed with respect to B to find the optimal bet size, given the
the objective of what should be
(exogenous) parameters and variables n, Po,a,and the Xh',. This results in

Differentiating (3) with respect to B, and setting this equal to zero, gets

This is the first-order condition for the optimal bet size, B. Solving this for B results in the following
quadratic equation:
0 - ll+xh(:-l)]B2 + 2Xho[l+n,(%-1)]B

Table 5 contains optimal bet sizes for some arbitrary values of the exogenous parameters and variables.
 A MARKET WITH EFFICIENT ARBITRAGE 437

Table 5

Bets and Expected Dollar Returns

Variable and Parameter Values

Optimal E [B ( x h n h - l )I B-B,l

1 0.18 $25,000 $4,000 $4,000 0.40 $2,403 $910.20

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2 0.18 9,500 1,500 1,500 0.50 710 549.00

3 0.18 7,600 3,600 1,600 0.77 485 40.40

3 0.20 7,600 3,600 1,600 0.77 422 31.20

3 0.22 7,600 3,600 1,600 0.77 360 23.20

3 0.22 9,500 4,000 2,000 0.77 626 56.20

3 0.22 9,500 4,500 2,000 0.77 450 29.00

3 0.22 9,500 5,000 2,000 0.77 260 9.60

While the sample values for n = 1 and 2 are totally arbitrary, those for n = 3 are representative of the
sample average. Hence, one can estimate the expected returns from arbitraging show betting odds
using the simple betting rule. Since there are typically 10 races in a program, and, at least for this
sample, just over half of the raw (120 out of 229) are bet upon, the bettor following the simple betting
rule would bet several hundred dollars in each of an average of approximately five races (sitting out
those races where no potential bets meet the requirements), lose approximately a quarter of the races
bet upon, and walk away from the track with, on average, maybe $100 more than he or she entered
with. Assuming attendance at 250 racing dates per year, this indicates a potential (presumably tax-free)
income on the order of $25,000 per year.
Since each bet is an independent bet, and the returns presumably have no covariance with any
other investment opportunity, it appears that a bettor with an initial capital of only several thousand
dollars could earn an income of approximately $500 per week. If so, why isn't this profit opportunity
being acted upon?
One possibility is that few professional bettors realize its existence, and few of them have the
ability to compute several fractions using 4 and 5 digit numbers within the space of a few seconds
before rushing to the betting window before it closes.
Another possibility, however, is that the final values of the fw'sare unknowable to a sufficient
degree of accuracy when the bets are being made, contrary to the assumption made throughout this
paper. If the fw's did change in a random fashion within the last minute of betting, the profitable bets
would usually be unknowable until after the betting window closed. To analyze the realism of the
assumption that the final betting fractions are. known when bets are actually made, a sample of the time
sequence of these fractions has been analyzed. To the best of the author's knowledge, the time
 438 J. R. RITTER

sequence of betting totals is not recorded anyhere. Consequently, the betting totals, which are posted
on the tote board and updated at 45 second intervals, were recorded for 10 races at harness horse
racetracks by the author.'
In all 10 races, the fraction of the total win bet, 6, bet on the ex mst favorite increased
during the last 1.5 minutes of betting, from an average of 0.318 at t,,-1.5 to an average value of 0.360
at If this is a representative sample, the "best" forecast of the find fraction of the pool bet on a
specific horse is the fraction at t,-1.5 plus (0.360-0.318 = 0.042). In the sample of 10 races used, this
prediction results in a foreast error standard deviation of only 0.020. Thus the coefficient of variation
is only 0.05. Furthermore, at least for the initial sample, the profitability of the simple betting rule
appears to be fairly robust with regard to small changes in the cutoff used (see appendix).
To explicitly analyze the effects of the stochastic nature of the ratios, further tests are required.
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Because of the small number of times in which the simple betting rule was implemented with place
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betting, analysis will be restricted to show betting. To distinguish between fb/f, at to, which is
unknown when betting is done, and fb/fhvat t,-1.5, we w ill denote the ratios as (fhs/fhw) t~ and
( f h s / f h w ) to-l.5, respectively. Ideally, to analyze the effect of differences between these two ratios
on the profitability of the simple betting rule, observations of the time series of the (k/fhv)'s should be
used. These observations are available only by recording them at a racetrack, at a time cost of
approximately 25 minutes per race-a very expensive proposition.
An altemative method would be to simulate the results by constructing a set of
( f h S / f h J t,-1,5 observations by adding a "noise" term to the final ratios, betting on the basis of the
( f h s / f h w ) to-1.5 with noise values, and analyzing the returns based upon the (fhs/fhw) values. To
~~

implement this procedure, an estimate of the stochastic process determining the time series of the ratios
must be used. Using the (fhs/fhw) t, observations of the 95 races in the independent sample, for all
fh 2 0.15, an error term drawn from a normal distribution with zero mean and variance 0.02 was
added.' The simple betting rule, with a cutoff value of 0.63, was then applied to this simulated
(fhs/fhw) to-1.5 series.' Whereas applying the simple betting rule with a 0.7 cutoff to the

(fhS/fhJ yielded 55 bets and a net return of 0.15 per dollar bet (Table 3), the simulation with

'Two races a t A r l i n g t o n P a r k o n December 27, 1977 and e i g h t r a c e s

a t Hawthorne P a r k on J a n u a r y 2, 1978 w e r e a n a l y z e d . S e e t h e a p p e n d i x
f o r t h e a c t u a l f r a c t i o n s . A cassette t a p e r e c o r d e r w a s used t o r e c o r d
t h e a p p r o x i m a t e l y 25 f o u r - d i g i t numbers which are u p d a t e d e v e r y
45 seconds.

61.5 m i n u t e s h a s b e e n c h o s e n as t h e l e a s t amount of time d u r i n g

which t h e r e l e v a n t f r a c t i o n s c a n b e computed and compared a n d a bet
a c t u a l l y made. The l a s t u p d a t e of t h e b e t t i n g amounts l e a v e s less t h a n
4 5 s e c o n d s i n which t o a c c o m p l i s h t h e s e a c t s , which t h e a u t h o r h a s found
t o be i n s u f f i c i e n t . The b e t t i n g window closes a t time to.

'The v a r i a n c e of 0.02 i s based upon t h e sample v a r i a n c e of t h e

d i f f e r e n c e s b e t w e e n t h e r a t i o s a t toa n d t,-1.5 f o r 1 5 h o r s e s w i t h
f, z 0.15 i n t h e 10 races r e f e r r e d t o i n f o o t n o t e 5 and i n t h e
appendix.

'This p r o c e d u r e i s i m p l i c i t l y a s s u m i n g t h a t t h e r e l e v a n t loss
f u n c t i o n i s b e i n g minimized by u s i n g (fb/fhw)te-l,5as t h e f o r e c a s t of
( f h s / f h w ) t. -
 A MARKET WITH EFFICIENT ARBITRAGE 439

noise yielded 39 bets and a net return of -0.01 per dollar, using the 0.63 cutoff, where the payoffs used
were the actual payoffs to these 39 bets if these bets had been made.9
This result is quite disturbing to the earlier analysis. While the -0.01 mean return that results
from the simulation with noise has a standard deviation of 0.14,it is far below the 0.15 return rralized
without taking account of the stochastic nature of the tJfk's, and casts severe doubt on the profitability
of the simple betting rule in practice. In other words, the $25,ooOincome referred to earlier may be
zero, or even negative.
In addition, I have been told by serious bettors that there are scores of bettors who try to
implement the strategy of the simple betting rule, so that for low values of ( f ,,Jf , the
t ~ - * 5,
expected value of [ ( f h s / f h v ) - ( f h s / f h v )t,-1,51
~~ is almost certainly very positive. [i.e., the
more people who use the Dr. Z system, the less attractive it is to use because the potential profits are
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competed away.] If this is a market in which efficient arbitrage is Occurring, so that all profits are
competed away, then the results of Tables 2, 3 and 4,where positive average returns appear to exist,
merely represent the ex realizations of those (fhs/fhw) which ex did not look profitable,
but which had unpredicted, and unpredictable, negative residuals from the best feasible forecasts.

Conclusions
Due to the large sampling variance, any conclusions based on a sample as small (n=229 races,
n= 120 show bets) as the combined sample here must be regarded as tentative. When the ratios of
show betting to win betting fractions, the (fhs/f,J t , ' ~ , are ~ssumedknown at &-1.5, one cannot
reject the hypothesis that a profitable betting strategy may exist at some harness horse racetracks. Once
uncertainty about the (f,/fhv) to's at t0-1.5 is explicitly introduced, however, positive returns appear
to be dissipated away. Thus, the horse race betting market would appear to be just another market
which seems to exhibit what might be termed "weak form" efficiency. When the uncertainty in the
(fhs/fhv) is taken into account, then the joint hypothesis that risk-loving bettors have non-positive
expected returns on all bets and that the betring market is informationally efficient cannot be rejected.
[Because some other bettors use the betting rule described here (the Dr. Z system), to
implement it profitably one must bet only on the very most attractive bets. Otherwise, one will be
consistently disappointed regarding the change in the odds between when a bet is placed and the final
betting totals, upon which the payoffs are calculated.]

References

Ali, M. M. "Probability and Utility Estimates for Racetrack Bettors,"J.P.E.85,no. 4 (August 1977):
803-815.
Griffith, R. M. "Odds Adjustments by American Horse-Race Bettors," American J. Psycholow 62
(April 1949): 290-294.
"A Footnote of Horse Race Betting," Transactions Kentuch Academy of Science 22
(1961): 78-81.
Gruen, A. "An Inquiry into the Economics of Race-Track Gambling," J.P.E. 84,no. 1 (February
1976): 169-178.

'The 0.63 cutoff is used instead of 0.7 because of the tendency for
low ratios at t,-1.5 to increase in the last 1.5 minutes of betting.
Having a lower cutoff in the stochastic world results in fewer ex Dost
unprofitable bets being made. The 0.63 value of the cutoff is based
upon the sample referred to in footnote 5.
 440 J. R. RITTER

McGlothlin, W. H. Stability of Choices Among Uncertain Alternatives, American J. Psvcholoev 69

@ecernber 1956): 604615.
[Ziemba, W. T. and Hausch, D. B., Beat the Racetrack, New York Harcourt, Brace Jovanovich,
1984.1

Appendix

Description of the Data-Lndewndent Sample

Data on the amount bet per horse for win, place, and show for horse races between
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February 8, 1978 and February 20, 1978 at Hawthorne Park Racetrack were provided by Chuck Waller
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of American Totalisator Co. As with the initial sample from Sportsmans Park (which, incidentally, is
located several hundred feet from Hawthorne). the last race of the day is not represented in the sample.
Otherwise, the races can be viewed as a random sample of the races occurring during February, 1978
at Hawthorne. One race was excluded from consideration because of a horse which was scratched
shortly after the betting began. Results of the races were taken from the appropriate issues of the
Chicaeo Sun-Times and Tribune, and verified against the calculated payoffs using equation (1).

Time Secluence of Bettine Fractions

For the 10 races referred to in footnote 5, the following fractions of the win bet pool were bet
on the g favorite:
fh

Final t0-l.5 A A-0.042

0.360 0.318 0.042 O.OO0

0.427 0.360 0.067 0.025
0.428 0.376 0.052 0.010
0.415 0.392 0.023 -0.019
0.350 0.333 0.017 -0.025
0.290 0.253 0.037 -0.005
0.484 0.448 0.036 -0.006
0.339 0.322 0.017 -0.025
0.287 0.236 0.051 0.009
-
0.288 -
0.235 0.053 0.011
M a 0.360 0.318 0.042 O.OO0

Appendix

DescriDtion of the Data-Initial S a m l e

Data on the amount bet per horse for win, place, and show for 136 horse races between
June 22, 1977 and August 19, 1977 at Sportsmans Park Racetrack were provided by Chuck Waller of
American Totalisator Co. Of the 136 races, which represent approximately one-third of all the races
occurring at Sportsmans Park during this time, one was excluded because of a horse numbered l a
which paid off, which I was unable to reconcile with the betting data. Results of the races were taken
 A MARKET WITH EFFICIENT ARBITRAGE 441

from the appropriate issues of the Chicaeo Sun-Times and Tribune, and verified against the calculated
payoffs using equation (1).

Values of Gain Function for Sample

Place Cutoff

Value of 0.85 0.80 0.75 0.70 0.65

hv
by NANYANG TECHNOLOGICAL UNIVERSITY on 05/10/16. For personal use only.
Efficiency of Racetrack Betting Markets Downloaded from www.worldscientific.com

Number of $2 Bets 97 55 23 9 4

Gross Return 185.40 107.60 53.80 26.40 11.40

Net Return (8.60) (2.40) 7.80 8.40 3.40

Show Cutoff

Value of f, 0.75 0.70 0.65 0.60 0.55

hv

Number of $2 Bets 98 65 42 26 10

Gross Return 215.60 151.60 97.20 63.60 27.00

Net Return 19.60 21.60 13.20 11.60 7.00