Dr Liam Lenten
First published in The Age on 6 November, 2012.
The race that stops the nation is with us again. Last year, $200 million was wagered on Cup day through the TAB alone, making it the biggest gambling day on the Australian calendar.
One imagines that lofty figure will be surpassed today, and it does not even count other online betting agencies, legitimate or otherwise, not to mention other informal forms of betting, making the mind boggle over the total figure wagered on this 152nd instalment of the two-mile thoroughbred classic.
As an economist who generally gambles only on this day annually, I find it difficult to understand those occasional punters who select their Cup pick on the basis of the name, number, silk or even jockey - this is so uneconomical.
Since many of the people putting their money on a horse today are once-a-year gamblers, let us consider a few economic rationales for optimal betting strategies.
Notwithstanding the disclaimer that I am not much of a punter, economic observations about markets from an outsider may have value to punters whose pre-existing habits and superstitions are too strong.
Firstly, and most obviously, seek the best odds (highest return) for your chosen bet once determined. Online bookmakers tend to offer better returns, since they have lower operating overheads.
This is not to say that one should not bet on the tote - after all, lots of people tend to enjoy the atmosphere of the punters' ''cubby house'', however, this experience has a material value, which should be traded off against the difference in returns offered.
If, based on this, you still prefer to venture to the tote, then delay placing your bet until not long before the race. That way, you make your decisions based on odds that approximate those actually paid afterwards. You also mitigate the chance of betting on a horse that is later scratched.
To this end, if your workplace runs one, always favour sweeps to commercial betting, provided selecting your horse is not so important to you - that is, if you wish merely to cheer for a horse per se. Sweeps are generally revenue-neutral (that is, the entire revenue pool is distributed back to the punters); hence the expected value of your stake is zero rather than negative.
In a related matter, there are certain biases in betting markets. While it may not be possible to arbitrage these biases in segmented markets, you may still be able to strategise your bets based on the expected value, which is simply the winning price multiplied by the expected probability of the win.
One well-known example is Black Caviar's later races, where it was often backed so heavily for the win, that a place bet was a far superior option, paying more with a higher probability of success. Following this theme, complex bets (trifectas, quinellas, etc) are best left to better-informed punters.
One such pointer is avoiding the Australian-bred horses (local bias). This was all too evident last year in the huge plunge on Niwot from $101 before Derby day to $10 by Cup day following its impressive victory in the Lexus Stakes, all because of the many punters who put their money where their hope was (forlorn as it happened) that there may be a local winner.
The cold hard evidence of results from the most recent few years, coupled with musings from informed racing analysts, tells us that we can expect more foreign domination.
A further observation well-known by sports economists is the ''Favourite-Longshot Bias'', which says that bettors tend to overvalue long shots. Therefore, one achieves better average returns by avoiding long shots (particularly from $20), and preferring favourites, which are generally undervalued.
Finally, if you lose, avoid the temptation to double up on the next race and the race after that as a system to recover one's losses. This is one manifestation of what is known as Gambler's Ruin, which tells us that a punter who uses this strategy systematically will eventually go broke, even if they derive a certain pleasure or benefit from each bet. Ultimately, setting a betting limit for the day prior to race 1 is a straightforward way to ensure restricted losses.
Finally, do not tell everyone these ''secrets'' - remember, you only derive a better-than-market-value bet with optimal strategies if other bettors out there are betting with sub-optimal strategies. With that, good luck (and much of it really is luck), and may the racing gods be smiling on your equine friend.
Liam Lenten is a senior lecturer in sports economics at La Trobe University.