Back or Lay Odds On?

[GaF]

Another interesting one from Betfair. http://www.betfairpromo.com/tactemails/newmswe1.htm

We got talking the other day in the office. If you had backed every odds-on shot in British horseracing, would you be showing a profit? One offered the theory that when there’s an odds-on shot, the market naturally over-reacts to its chances, and so it is over-bet. Meaning that in the long run, odds-on shots would win less often than the price suggested they should. Another thought that odds-on shots would win more often than the price suggested they should because of the number of people who wanted to lay them – meaning that their price was artificially higher than it should be. But no good arguing about it. We sent someone into the dungeons of data control, to find out how often horses win at all prices. How did we work this out? The person we sent hasn’t come back, but the data has. And the “ayes†have it. But only just. If you’d backed all the odds-on shots in British horseracing in the last 18 months, you’d have made a slight profit. In fact, if you’d backed every horse at 6.0 or less you’d have made a marginal profit. At the other end of the spectrum, backers of longer priced horses would have lost a small amount of their money over the period. That’s the theory at least. But surely what this really shows is that, give or take a few fractions of a percent, Betfair prices are actually extraordinarily accurate reflections of a horse's chance of winning a race. And it's worth remembering that this is historical data and not a predictor of future events. It also looks at average weighted prices – which isn’t something you can know until after the event. And there's commission to take into account. The value of investments can go down as well as up and all that. The full results are below. We’ve grouped all the horses into price ranges – averaging the expected win rate and the actual win rate:

Price Banding Average EXPECTED win rate Average ACTUAL win rate Difference 1.01-2 64.38% 64.84% 0.46% 2.01-4 36.61% 36.88% 0.27% 4.01-6 20.27% 20.66% 0.39% 6.01-10 12.77% 12.6% -0.17% 10.01-20 6.93% 7.1% 0.25% 20.01-100 2.64% 2.56% -0.08% 100.01-1000 0.3% 0.26% -0.04%

http://www.betfairpromo.com/ashes05/crm/images/gradient1.jpg> How did we work this out? We grouped all the horses at various prices. As an example, if a horse was 1.5, then we said that the market was theoretically saying that it had a 66.6% chance of winning the race (100 divided by the price). This gave us the “Expected win rateâ€. We then checked how often they actually did win – the “Actual win rateâ€. In this example, if 1.5 shots won more than 66.6% of the time, then the “Difference†would be positive – meaning that you’d have made a profit backing all of them. We looked at all the Win markets from UK racing, jumps and flat, from 1st January 2004. We excluded any race that hadn’t a traded volume of more than £50,000. We took the weighted average price that each horse traded prior to the off (so not including in-play) – over 157,000 horses in total. These were then grouped into the bands you see above and averages taken.