Payoffs?! We’re Talking ‘ Bout Payoffs!?!

“We’re just trying to win the game!” (This article appeared in two parts in the September and December HANA Magazine)

A common refrain I’ve seen on Twitter recently, spurred by the popularity of both the Saratoga and Del Mar meets, is “X [Exotic Bet] payoff amount seemed a little light”. Many culprits are to blame: the sharps, the computers, the $0.50 or $0.10 minimums, the obscene takeout. The only bet avoiding this fate seems to be the low takeout Pick-5s that accompany the day’s first [flat] race in both New York and California. Many players consider it the best bet in the game – I am one of them.
Still, there are dozens of exotic bets each day that are not the Pick-5 and their payoff math seems to confound even seasoned horseplayers. Perhaps that group especially has seen exotic pools diminish as a source of value over time, another side effect to the macro trends driving horse racing. The culprits identified above are all legitimate if not the biggest reason exotic payoffs appear slim these days. Let’s look at an example of what might happen on an exotic bet in this modern era.

7-horse race, 18% takeout in the Win Pool – 3 logical (evenly-matched) horses, 4 longshots. The odds board looks like:

Alpha Red 2-1
Beta Orange 2-1
Gamma Yellow 2-1
Delta Green  30-1
Epsilon Blue 30-1
Zeta Indigo 30-1
Eta Violet 30-1
You are certain from your handicapping that the three favs are going to make up the trifecta and you’re excited to get a 30-1 shot in for 4th of your superfecta. Your $1.00 superfecta ticket (1-3/1-3/1-3/4-7) costs $24. The race runs exactly to your script – 2-3-1-6. You do some quick math in your head (2x2x2x30 = $240 – $40 for takeout) –> $200 BOOM!

The Race is Official – the $1 superfecta payoff flashes – $18.24. You turn to your friend – “Man, that superfecta came up light…”

What happened? Well, math happened, and several things about this hypothetical race show why payoffs can often look small.

It’s obvious, in retrospect, what happened to our dumb-luck player – he projected the win pool odds of a longshot of 30-1 to be the same for any given place in the exotics. However, the probability for any one of the longshots to be in the superfecta is a little over 25%. There’s a 100% chance that at least one of them will. So, instead of 30-1 for 4th, he’s getting maybe 5-2. You wouldn’t play four horses at 5-2 each in the win pool.

In the first three slots of the trifecta, there were only 6 combinations of horses; there were just 4 outcomes for the 4th spot – at no takeout, payoffs would only be $24.00 for a $1.00. Take 24% off the top, and he has lost money on his ticket.

This may be a “perfect storm” case of bad betting, but it does highlight several reasons why exotic bet payoffs are shrinking, both in reality and perception. Today, I’ll look at what I think is the biggest issue; Part 2 in the next issue will deal with the other culprits (takeout, minimums,computers, etc.)

Field Size is a Bigger Factor in Exotics than Straight Bets

In HANA’s Track Ranking metrics, takeout is the biggest factor in a high ranking and field size is second (takeout is about 40% more important, in the algorithm, for the three of you interested). For exotic players, however, field size may actually be the much more important factor.

A very popular theory about exotic bets is that they mitigate high takeout because you make 2+ bets but only have a single takeout (this theory is mostly applied in Pick-X wagers compared to a win parley). Thought of another way, an exotic bet can improve your price per opinion, meaning for an exacta bet you pay one takeout for your opinion on the winner and one for your opinion on the second place horse.

It’s that dynamic that shows why exotic bet payoffs are especially susceptible to field size. Let’s compare a race with 8 runners to one with 7:

Win Pool: 8 outcomes vs 7, a decrease of 12.5% in the options the betting public has in a race
Exacta Pool: (8×7=56) outcomes vs (7×6=42) outcomes, a decrease of 25%
Trifecta Pool: 336 outcomes vs 210 outcomes, a decrease of 37.5%

The total potential outcomes matter very much because the win odds do not reflect the probability of a horse rounding out an exotic bet, like in our bet above. Longshots in larger fields (9+) will continue to provide large multipliers nearer to their win pool odds.

If you ask yourself the question “Is this vertical exotic bet likely to payoff near a multiple win pool odds?” subtract 5 from the race’s field size, and only play verticals where positions required is less than or equal to the difference, i.e.
Field Size 6 or less – payouts won’t be multiples
7 – Exacta only
8 – Exacta/Trifecta
9 – Exacta/Trifecta/Superfecta
In horizontal bets, the situation is the same. A Daily Double with two 7-horse fields has 24% fewer combos than two 8-horse fields. Even the prevalence of a single short field in a horizontal bet can hurt payoffs – a 10-horse field paired to a 6-horse field has only 60 potential combos vs two 8-horse fields getting 64.
Other Negative Factors causing Lower-than-Expected Payout
1.       Smaller Pools – A small pool size can often lead to negative price distortions and pay out less than win-pool multiples. Let’s say a small-track P4 sees 4 10-1 horses winning. Some quick estimation says a $10,000 for $1 is not an unlikely potential payout. Small tracks, however, may not attract enough handle to fully pay out combinations at the likely multiple. If there’s only $7000 in that small-track P4, that’s all you can win (and you might even have to split that!)
2.       Higher Takeout – We’ve been saying it for years. If there’s less money available to be returned to bettors, less money will be returned to bettors. (And they’ll bet less next time)
3.       Lower Betting Minimums (with Multiple Longshots) – Lower betting minimums ($0.50 Tris,P3-4s, $0.10 Supers, etc) have long been lamented as having decreased average payouts, and it’s true to some extent. Since many exotic sequences will feature at least one price horse, being able to more easily spread bets on a single ticket means those pools will be hit by multiple tickets. When the pools are big enough, some large bettors can structure and play tickets at low minimums that allow them to “crush” chalky sequences and simply “hit” longshot sequences while still having a positive return in either scenario.
4.       Whales & Rebates – This is probably a bigger deal than I may give it credit. In the quest to find value in pari-mutuel pools, gamblers with an edge often go into the exotic pools to capture it (exacta pools are frequently larger than win, for example). If you’re on the same horses as a shark, you’re going to see lower payouts than you might think. Also, since exotics have some of the highest rebates in the business (because they have the highest takeout), many large bettors will play into these pools to eek out a small return that will be amplified by their rebate.
5.       Machine Betting – Computer players and automated programs especially can take advantage of any mispricing they see in certain pools, like doubles and exactas, for which the tote operator provides information. For example, a computer can quickly compare Win pool odds to Daily Double Will-Pays. Frequently, a Double pool will be mispriced relative to a win pool. Say the computer’s most likely winner is 2-1 but can see from the Will-Pays that the Double pool is averaging a 3-1 return, a 33% increase in payout. The computer can play a weighted 1-ALL ticket into that double pool to get exactly that 3-1 return, regardless of who wins the next race. In so doing, they reduce the potential payout for everyone else. This is called arbitrage.
Positive Factors for Higher-than-Expected Exotic Bet Payouts
1.       Carryovers (Non-Jackpot) – Carryovers most often occur in the large Pick-6 pools in California and New York, but they can be found elsewhere. The carryover gets added to the pool, which has a similar impact to reducing takeout. They make for really good bets – carryover payouts will quite frequently “beat the parlay” and frequently have an effective takeout below 10%.
2.       Larger (and Guaranteed) Pools – An exotic pool often needs to be of a minimum size to pay off the combination of horses that go into it. Large pools will, more often than not, pay out near or over the expected odds (based on win pool %s). Guaranteed pools usually take advantage of this fact to attract betting dollars. On the other hand, a missed guarantee can be great for bettors
3.       Lower Takeout – We’ve been saying it for years. If there’s more money available to be returned to bettors, more money will be returned to bettors. (And they’ll bet more next time)
4.       Lower Betting Minimums (in chalky sequences) – If lower minimums cause longshot sequences to generate low payouts, the converse must also be true – low mins help chalky sequences have higher than expected payouts. If players play lots of longshots that don’t hit, their handle goes to the more commonly-held chalky sequences. Here’s the thing: those payouts may only be 5-10% higher than they should be, but they are held by more people. When a big longshot sequence misses by 30% of expectation, that’s a negative surprise for a few. When a chalky sequence pays $15 than you think it should, that’s a cheeseburger and a beer. Bonus – the track will withhold 25% of your winnings on $600 payouts less often.
5.       Public Money – The opposite of swimming with the sharks, when the public throws their money at longshots in every pool, it’s time to feast!