Takeout – The Price Isn’t Right – Part 1

The price of betting on horse races in the United States is too high. I say that as a horseplayer, a student of economics, and a professional whose job is literally pricing. Now, there are many industry insiders who would say the opposite, that the price of betting on races is too low, that more revenue is needed to support purses, track operations, and generate a little profit for owners. The “price” of horse betting is, of course, the takeout on a bet which for most bets is between 15 and 30%.

We horseplayers say takeout is too high for many reasons, but the one I find most compelling is that the horse betting is highest compared to other forms of betting, most importantly sports betting and poker. Horse racing shares with these the fact that the player does not bet against the house, but against other players, the casino or bookie taking a percentage of every bet as their revenue. Vegas sportsbooks across the board charge a 10% fee; on a 50/50 prop bet (e.g. with point spreads), the house will take $110 to win $100. A typical poker room will take 10% of every pot – however, most tables will have a max rake per hand (say $4 at low levels) that decreases the effective take rate on really large pots. These are player-friendly business practices – clear pricing and volume discounting.

It is no wonder smart money bets sports or poker tables. Any edge a player can garner over the public is not whittled away by the house. A 55% strike rate can win in sports betting at even odds. Poker has a different strike rate, but the biggest money games have a very low takeout % – it costs house just as much to put on $1/2 No-Limit game as it does a $1000/2000 game, so the rake is adjusted accordingly.

Most horseplayers, however, bet into pools with takeout between 16-22%, requiring a much higher success rate to break even. The common argument from tracks is that most players do not respond to lower takeout nor do they change their behavior much when takeout increases. But basic math tells us that handle will decrease with higher takeout, and vice versa, holding player behavior constant. As winning bets win less, players will have less money to bet into subsequent pools, decreasing “churn” and handle in turn.

Coordinated efforts such as the HANA boycott of California tracks last year have had a one-time impact on handle, but Santa Anita (at least) has come back this year, driven primarily by the increase (by over 1 horse/race) in average starters. Lenny Moon over at Equinometry suggests a similar tactic, diverting play into pools with lower takeout rates in hopes of convincing tracks to bring rates down. I like this tactic but am afraid that the “herding cats” metaphor applies to horseplayers all too clearly – it is very difficult to drive collective action when there are so many other factors that drive players to bet.

Similarly, I find it telling that a lot of racing handle is being diverted to forms of play that have lower takeout naturally. For example:

  • Carryovers – frequently, large carryovers create positive expectation bets because the free money part of the jackpot pool is frequently a greater percentage than the takeout
  • Syndicates and Players Pools – Players will use these to go after the jackpot Pick-X races (and carryovers) which have higher total takeout but averaged across races are lower. Usually, the payouts exceed the win parlay for the X races, partially a product of the lower average takeout.
  • ADWs – ADWs have rewards programs for large bettors that frequently provide cash for higher betting volumes. This cash back policy reduces effective takeout for the player.
  • Handicapping Tournaments – entry fees are pooled and winnings split, frequently with no takeout. Even when these tourneys have a live bankroll playing into the pari-mutuel pools, the effective takeout is much lower for the winning players.

I certainly have taken advantage of all these options, even if most of my play is in p-m pools. I especially want to give the tourney structure more of a try, but Saturday afternoons are prime family time and I cannot yet play Derby Wars in my state. Regardless, I find it fascinating that betting is growing where the price is the lowest, and technology is enabling those lower prices – a trend I expect to last well into the future.

In the next installment, I’ll look at the track’s perspective and why so many are reluctant to try lower takeouts in their main pools and what I think is the best solution for finding the right price to play the ponies.