Pricing Exotic Racetrack Wagers PDF

Pricing Exotic Racetrack Wagers
Donald B. Hausch, Victor S.Y.Lo and William T. Ziemba
School of Business, University of Wisconsin.

Madison. Wisconsin 53706
Management Science Division, Facdty of Commerce,

University of British Columbia, Vancouver BC, Canada V6T 122
Management Science Division, Faculty of Commerce,

by NANYANG TECHNOLOGICAL UNIVERSITY on 05/11/16. For personal use only.
Efficiency of Racetrack Betting Markets Downloaded from www.worldscientific.com
University of British Columbia. Vancouver BC, Canada V6T IZZ
Abstract
Numerous authors have found that the win market at racetracks is essentially weak-form efficient.
The relative amounts wagered at various odds levels provides a fairly accurate estimate of the true
chances of winning. However, the accuracy of this estimate can be improved by adjusting for the favorite-
longshot bias. This is the tendency for bettors to significantly overvalue low probability high payoff
wagers on longshots and significantly undervalue high probability low payoff favorites. The resulting
pricing equation coupled with a probability model for running time distributions generates accurate
probabilities of all possible finishes. This allows us to price exotic wagers such as the exactor, triactor,
quinella and daily double, and to identify when such bets have a positive expected return.
1. Introduction
Racetracks form interesting financial markets. They share many features of listed securities
markets, such as limited liability, prices that depend upon the demand characteristics of the investors, etc.
The ever-changing odds prices correspond to a constantly updated futures market with a cash settlement
after the race has been run. An exotic wager involves more than one horse. Exotic wagers such as the
exactor, quinella, triactor, daily double, pick three, four, six, seven and nine allow investors to construct
low probability high payoff wagers much akin to highly levered options or futures positions. Important
differences are higher transaction costs, the usual absence of tax effects, and the market ends with the
conclusion of the race, at which time all payoff uncertainty is resolved.
Previous work on win market efficiency (see Griffith (1949), McGlothlin (1956), Ali (1977),
Fabricand (1965,1979), Quirin (1979), Snyder (1978), Asch, Malkiel and Quandt (1982) and Ziemba and
Hausch (1984,1986,1987)) found that bettors had a marked tendency to overvalue low probability high
payoff gambles and to undervalue the high probability low payoff gambles. i.e. the favorite-longshot
bias'. Although the bias has been found by many researchers, it is insufficient to overcome the track take
' Busche and Hall (1988) and Busche (1994) are exceptions for Hong Kong and Japan.
469
470 D. B. HAUSCH, V. S.Y. LO AND W. T. ZIEMBA
except for horses at odds of 3-10 or less (Ziemba and Hausch (1986)). Such extreme favorites are rare,
though, so for practical purposes, the market can be considered to be weakly efficient. An apparent
reason for the efficiency in the win pools is the ready availability of the prices on tote boards and T V
screens and the ease with which the investors can sift through this information. Another aspect is
simplicity of the win bet; it depends only on the performance of one horse.
Betting on exotic bets, however, usually requires estimates of ordering probabilities (e.g. the
probability that horse i wins and j finishes second). One way is to estimate these ordering probabilities
based on the estimates of the win probabilities. The win probabilities can be estimated by the win bet
fractions if the win market is considered to be efficient. The stable nature of the favorite-longshot bias
suggests that, by accounting for it, we can improve our win probability estimates based on the public's
win odds. To estimate the ordering probabilities, Harville (1977), Henery (1981) and Stern (1990) are
three alternative models. These models assume different probability distributions for the running times
of horses. Bacon-Shone, Lo and Busche (1992 b) demonstrate that the Henery model appears to best fit
their U.S. data and Hong Kong data. However, this does not appear to be universally true; Lo (1994)
indicates that the Stern model fits the Japanese data best. In a smaller study, Stern (1990) also finds that
his model fits the data better than the Harville model. Although the Harville model does not appear to
have as good a fit as the others, there is a tradeoff between complexity and accuracy: the Harville model
is simple to apply in practice while the other two models rely on numerical integrations. Lo and Bacon-
Shone (1993) give an approximation to both models and show that it works well in practice.
With estimates of the required ordering probabilities for the exotic bet, the next question is how
to bet. Maximizing expected return on a race-by-race basis is very risky, with bankruptcy likely (see
Epstein (1977)). Hausch, Ziernba and Rubinstein (1981) propose using the "Kelly criterion" which was
originated by Kelly (1956) - one maximizes the expected logarithm of final wealth. This method avoids
bankruptcy. That study concentrated on place and show bets, that is, the bets pay off when the horses
finish in the top 2 and 3 positions, respectively. Independently, Asch, Malkiel and Quandt (1984, 1986)
developed logit prediction equations which indicate that place and show inefficiencies exist. This paper
considers betting on exotic bets.
This paper is organized as follows. Section 2 briefly surveys the research on the win market
including the favorite-longshot bias, its correction, the weak form efficiency of the win market aside from
the anomaly of statistically significant profits for extreme favorites, and various probability models for
predicting ordering probabilities. Then Section 3 indicates how to price a general exotic bet, with the
exactor, quinella, daily double and triactor treated as particular cases. The Hong Kong quinella market
is chosen to illustrate our betting system. Concluding remarks appear in Section 4.
2. Efficiency of the Win Market
Table 1 and Figure 1 summarize the data in Snyder (1978) who combined the results of Fabricand
(1965), Griffith (1949), McGlothlin (1956), Seligman (1975) and Weitzman (1965) with his own data.
One clearly sees the favorite-longshot bias and the weak form efficiency of the market in the sense that
no trader can make profits solely on price (odds) information.
PRICING EXOTIC RACETRACK WAGERS 47 1
-30 -
-L
Figure 1: Expected Value Per Dollar Bet for Different Odds Levels, in 35,285 Races Run During 1947-
1975; Source: Snyder (1978).
Rates of R m u n on B I ~ J10 Win by Grouped Oddr. Take Addcd Bark

Midpoint of p u p c d a l d s
Study 0.75 1.23 23 5.0 75 10.0 15.0 33.0

Fabncznt ll_ll 9.Q 4.6' -1.4 -3J -3.7 -8.1 -39.5'
-659
Griffilh
hlcGlolhlin
8.0
8.C"
4.9
8.P
-
3.1
8.W
1.0
-
-3.1
0.3
1.0
-34.6'
- 4.6
- LO
-34.1'
- 7.0"
-
-10.5
- Q.7
- 7.3
- 11.0
- 24.1
Seligrnan
Snyder
14.0
5.5
4.0
53 4.0 -,I2 3.1
1.0
2.9 1.4 - 15.9
Weianin 9.P 3.1 6.5' - 13 - 4.2 - 5.1 - 8.1" - 18.0.
Combined 9.1' 6.4' 6.1' - 1.1 - 5.2' - 52' - 10.1' - 23.7
'Significantly different fmm zero at IF6 Inel or bctrer.
'Significantly dirfemnr fmm LCIO at 5% lcrei or better.
Table 1: Summary of the Six Studies Comparing the Rate of Return on Win Bets at Various Odds Levels;
Source: Snyder (1978).
472 D. B. HAUSCH, V. S . Y. LO AND W. T. ZIEMBA
These data were based on pari-mutuel wagering using the totalizator method of betting in North
America. Figure 2 considers wagers made head to head with bookies in England. The shape of the bias
is broadly consistent with that in Figure 1. Figure 2 extends the odds range, though, and one sees positive
returns for extreme favorites and extremely low expected returns for horses with the longest odds. Based
on this data. plus that in Ali (1977),As&, Malkiel and Quandt (1982), Quirin (1979) and Ziemba and
Hausch (1984)one has the aggregate rate of return versus odds summary Figure 3. The graph compares
California with one of the lowest track takes of 15.33% with New York which has one of the highest,
17%.
Figure 2: Expected Value Per Dollar Bet for Different Odds Levels in all British Flat Races During 1950,
1965 and 1973. Taxes of 4% on-eourse and 8% off-course must be subtracted to give the actual return
to bettors. Source: Ziemba and Hausch (1986), using data from Figgis (1974) and Lord Rothschild
(1978).
PRICING EXOTIC RACETRACK WAGERS 473
120
'Track Odds (Log Scale)

Figure 3: The Effective Track Payback Less Breakage for Various Odds Levels in California and New
York. Source: Ziemba and Hausch (1986).
rca -
Pcual chance of winning
.- estimate of ~e c.'ancr of ,winning

a
c'
Tryk odds (Log Scale)
Figure 4 Actual Chance of Winning Compared with the Crowd's Estimate of this Chance at Various
Odds Levels for Horses in 2,196 Races in New York in 1971. Source: Ziemba and Hausch (1986), using
data from Quirin (1979).
TO compute the probability that a horse at odds level Oiwill win a given race we must correct
for the bias. Plotting the Quirin (1979) data results in Figure 4. Similar plots for the Ali and As&,
Malkiel and Quandt data appear in Ziemba and Hausch (1984). Aggregating all the data yields the
corrections in Table 2 and the formula:
474 D. B. HAUSCH, V. S. Y. LO AND W. T. ZIEMBA
Quoted Pdiustment Effective Track Pavback

Q&kiLsJ&kma-- ..LYeYdxk
1-20 0.05 0.09 20.8 104.5 104.0
1-10 0.10 0.19 20.3 104.0 102.3
1-5 0.20 0.39 18.0 101.7 100.0
2-5 0.40 0.59 14.0 97.7 96.0
3-5 0.60 0.79 10.0 93.7 92.0
4-5 0.80 0.99 9.1 92.8 91.1
1-1 1 .oo 1.19 8.2 51.9 90.2
6-5 1.20 1.39 7.3 91.0 89.3
7-5 1.40 1.49 6.4 90.1 88.4
8-5 1.60 1.79 6.3 90.0 88.3
9-5 1.80 1.99 6.2 89.9 88.2

2-1 2.00 2.49 6.1 89.8 88.1

5-2 2.50 2.99 6.1 89.8 88.1
3-1 3.00 3.49 4.5 83.2 86.5
7-2 3.50 3.99 3.0 86.7 85.0
4-1 4.00 4.49 1.5 05.2 83.5
9-2 4.50 4.99 0.0 83.7 82.0
5-1 5.00 5.59 -1.2 82.5 80.8
6-1 6.00 6.99 -1.9 81.8 80.1
7-1 7.00 7.59 -2.6 8i.1 79.4
8-1 8.00 8.99 -3.2 60.5 73.8
9-1 9.00 9.99 4.2 79.5 77.8
10- 10.00 10.59 -5.2 73.5 76.8
?!- 1 1 .oo 1 1 .s9 -6.2 -- -
77.5 75.8
12-
13-1
12.00
13.00
12.99
13.59
-7.2
-8.2
--
IO.5
fS.5
74.8
73.8
14-1 14.00 11.99 -9.2 76.5 72.8
15-1 15.00 15.99 -1 0.2 73.5 71.8
16-1 15.00 15.99 -11.2 72.5 70.3
17-1 17.00 17.99 -1 2.2 71.5 69.8
18-1 18.00 18.99 -13.2 70.5 E8.8
19-1 15.00 19.99 -14.2 E4.5 67.8
20-1 20.00 20.S9 -15.2 63.5 6e.8
21-1 21 .oo 21.99 -1 6.2 67.5 65.8
22-1 22.00 22.99 -17.2 6.5 64.8
23-1 23.00 23.99 -18.2 E5.5 E3.8
24-1 24.00 24.59 -19.2 6.1.5 62.8
25-1 25.00 25.99 -20.2 63.5 61.8
30-1 30DO 34.59 -25.2 58.5 56.8
35-1 35.00 39.99 -36.0 47.7 46.0
40-1 40.00 49.99 -39.9 c3.a 42.1
50-1 50.00 59.59 -43.7 40.0 38.3
60-1 60.00 69.59 -47.5 36.2 34.5
70-1 70.00 79.99 -51.4 32.3 30.6
80-1 80.00 89.99 -55.2 29.5 25.8
90-1 SO.00
100-1 100.00 -
59.99 -59.0
-70.0
24.7
13.7
23.0
12.0
Table 2: The Effective Track Payback Less Breakage for Various odds Levels in California and New
York.' Source: Ziemba and Hausch (1986).
The track take is 15.33% (17% New York) for an average payback of 84.67 centS per dollar wagered
(83%). Breakage is to the nearest 10 cents below the m e computed amount per dollar wagered. At 9-2
the breakeven point in the favorite-longshotbias, breakage amounts to about another 1% commission.
lr --
Q+D,
0,+1
where r, is the probability that a horse at odds 0, will win, Q is the track payback (i.e. one minus track
take) and D,is the adjustment from Table 2 for the favorite-longshot bias of odds level Oi. Figure 5 plots
equation (1) for California and New York and also gives the probabilities of placing (finishing first or
second)2 under the assumption that all horses other than the horse in question have the same odds.
T n c t Sacs L q W e 1
Figure 5: The Probability of Winning Odds and Placing at Various Odds Levels in California and New
York. Source: Ziemba and Hausch (1986).
The data on extreme favorites consists of that of Fabricand (1965, 1979), Figgis (1974) and Lord
Rothschild (1978) and Ziemba and Hausch (1984). Summarizing these data indicates, as shown in Figure
6(a) and (b). that positive profits set in at odds of about 3-10, corresponding to a win probability of about
70%.
The probability of placing is computed by Harville (1973)s formula. There is a systematic bias of
this formula for calculating the probability that a horse finishes second. As this bias is opposite to the
favorite-longshot bias, and because the probability a horse places is the sum of the probabilities that a
horse finishes first and second, these two biases tend to cancel one another. However, this may not be
sufficiently accurate. One way to correct for this is to use the transformation suggested in Benter (1994).
This is an alternative to the models that follow.
476 D. B. HAUSCH, V. S.Y. LO AND W. T.ZIEMBA
Win Odds
Figure 6(a): Probability of Winning on Extreme Favorites in California and New York. Source: Ziemba
and Hausch (1986).
-
.94
.94
.92
-
I I I I
\t:
I
1/10 115 a5
Odds
Figure 6@): Expected Value per Dollar Bet on Extreme Favorites in California and New York. Source:
Ziemba and Hausch (1986).
Equation (1) with its Table 2 correction provides an estimate of horse i's win probability, T?
Define xq E P(i wins, j finishes 2nd) and T+ I P(i wins, j finishes 2nd, k finishes 3rd). Natural
estimates of these two ordering probabilities are:
nix.
and
n.. -2
1-n,
nut - n i
x.
L
n
A
1-n, 1-x,-n.
Harville (1973) first suggested the use of (2) and (3). Dansie (1983) showed that they follow from the
assumption that the running times of the horses are independently exponentially distributed with different
means. Henery (1981) proposed an independent normal running times model, i.e. the running time of
horse i, T - N(Oi,l). One may argue that this model may not be realistic as the probability that T. <
0 is positive. However, we are actually interested in ordering probabilities only, e.g. P(T < <
others), so any monotonic increasing transform of the running times will not change the probabilities.
Hence, the Henery model is equivalent to assuming that any monotonic increasing function of the running
times are normally distributed. In particular, if the function is logarithmic, then the running times are
lognormally distributed. With Henery's normality assumption,
-
xu - --j q u + e , - e i ) II [i-e(u+ej-er)l+(u)du,
r4.I
where +(.) and d(.) are cdf and pdf of the standard normal. The mean running times 0;s are estimated
by solving the following set of nonlinear equations:
-
n, - _"
1 n[i-w+ei-e~le(v)dv i-12,...,n.
'*I
We may estimate the win probabilities r,'s by using the win bet fractions or the corrected form stated in
(1). However, no closed form solutions can be found. The formula for is slightly more complicated.
Another probability model is due to Stern (1990). Instead of assuming independent exponential
distributions for the running times, which implies the Harville model, he assumed independent Gamma
distributions with predetermined shape parameter r and scale parameters that can be estimated by using
the estimates of win probabilities. When r= I, it is the Harville model. Using a small data set, Stern
shows that r = 2 fits his data better than the Harville model (i.e. r= 1).
Bacon-Shone, Lo and Busche (1992 b) indicate that the Henery model is significantly better than
the others using their US. and Hong Kong data. However, Lo (1994) shows that the Stem model with
shape parameter, r=4, fits their Japanese data best. While there does not appear to be a universal model,
all the evidence points away from the Harville model. Unfortunately, the Henery and Stem models
involve complicated numerical integration and solution of systems of equations, though, making their
practical use questionable. However, Lo and Bacon-Shone (1993) propose the following approximation
to the ordering probabilities based on the Stern model :
47 8 D. B. HAUSCH, V. S. Y.LO AND W. T. ZIEMBA
and
These formulas, called the discount model, include the Harville model and approximate the Henery and
Stem models. Lo and Bacon-Shone suggest appropriate values for X and 7 for different r as shown in
Table 3. They show that this approximation is quite accurate using their U.S., Hong Kong and Japan
data. We define that when r= co, the discount model reduces to the approximate form of the Henery
model.
0.87 0.80
0.86 0.78
7 0.86 0.77
8 0.85 0.76
10 0.84 0.75
20 0.82 0.72
30 0.81 0.71
-
40
(Hcoery)
0.81
0.76
0.70
0.62
3. Pricing exotic waeers
Hausch, Ziemba and Rubinstein (1981) developed a strategy for betting to place and show that
utilized the "Kelly criterion" (Kelly (1956)). The properties of this criterion include the following : (i)
it maximizes the asymptotic growth rate of capital; (ii) the expected time to reach a predetermined goal
of capital is minimum asymptotically; and (iii) the final capital is higher than that of any other "different"
strategies asymptotically. These are proved in Breiman (1960,1961). Other properties of this criterion can
be found in MacLean, Ziemba and Blazenko (1992). This betting strategy in horseracing is further
developed by Hausch and Ziemba (1985), and is discussed in detail in Ziemba and Hausch (1984,1987).
The system developed by Hausch, Ziemba and Rubinstein (1981) identifies the inefficiencies in
the place and show markets. The simple formulas proposed by Harville (1973) in (2) and (3) are used
to estimate the ordering probabilities. Lo, Bacon-Shone and Busche (1994) suggest using the discount
model proposed in Lo and Bacon-Shone (1993) together with the betting strategy. Here, we concentrate
on exotic markets where each bet involves more than one horse. First, we require estimates of the
ordering probabilities. The formulas given in (4) and (5) with )r=0.76 and ~ = 0 . 6 2(i.e. to approximate
the Henery model) appear to work quite well in the U . S . (Lo. Bacon-Shone and Busche (1994)). These
formulas are more complicated than the Harville model and they require the estimates of win probabilities
for all horses for each combination.
With the estimates of the ordering probabilities, the next step is to employ the "Kelly criterion"
to determine the optimal bet amount on a particular combination. We now derive the general formula for
an exotic bet and then discuss particular cases. To make our system more practical, we only consider
the simple case of betting on one combination of horses and assume that the pool size is large enough so
that the odds will not be changed by our bet. Because there will not be many good bets for longshots,
we suggest screening out these horses. One way to do so is to concentrate only on those horses at odds
of 8-1 or less. Suppose 0 is the odds (i.e. net profit per $1 bet if we win) associated with our bet.
Further, let W, and f be the current capital and the fraction of the current capital we should bet,
respectively. In addition, let the probability of winning be p . One may select a combination with highest
positive expected return, where
Expected Return of a $2 wager - 2 ( 0 +1) p - 2. (6)
We may want to have an edge of 100E%,so that we bet on the combination if the expected return of a
$2 wager is at least 2E, or
offered price of a $2 wager - 2(0+1) t 2(1+E) . (7)

P
Among the combinations satisfying (7), we could choose the one with highest chance of providing a
return, p. Then we can proceed to use the "Kelly criterion" to determine the optimal bet.
The new wealth, W will be Wo(I+fO)with probability p and Wo(l-j)with probability I - p . The expected
log capital is
mgw) - P ~ o g [ ~ o ( ~ + f o ) l(l-P)log[woY,(l-nl.
+ (8)
The "Kelly criterion" maximizes this expected log capital with respect tof. The optimalfis
p(O+1) - 1
f - 0
(9)
For the exactor, we must choose the horses that finish first-second to win our bet. Let 0, be the
exactor odds for the combination i andj. The estimate of p is given by (4). Using (9), the optimal wealth
fraction for exacta betting on horses i and j is
XF(O,+l) - 1
f -
Oii
480 D. B. HAUSCH,V. S.Y.LO AND W. T. ZIEMBA
Similar formulas hold for other exotic bets. Table 4 summarizes the odds, the relevant ordering
probability and its estimate for the exactor, triactor, quinella and daily double.
With the formulas of the ordering probability for each case in Table 4, formula (9) can be easily
applied). In fact, formula (9) is easy to implement on a hand-held calculator or from a table plotting p
versus A/C where A is the price being paid for the combination payoff and C is the theoretical cutoff
value to achieve the edge E. See Ziemba and Hausch (1986) for details.
Exotic M Odd. (0) CTdCrirg P#imr.ts of p

-w (P)
EUMr 0, ( i J = l . ....m;
i#k) A
4
-
xi
c
rri
x:
T d r 0, (iJ.k= I . ..n: ..
i#j#k)
=Ub
rri r*iJ
Quineu. 0, ( i J = l . ....n;
i<J>
nji
%j+
Wly doubk O,(i=l,._.. 0,:

j = I.....n,) q1) + "p,
.- of SllinuIU of
NYO win probabilities
Table 4: Formulas of the Orcering Probabilities for irious Exotic Bets.
In the case of the daily double, n, is the number of horses in race 1 and ~ ( is
l )the win probability of
horse i in race I , I= 1 or 2.
The system was tested using 369 Hong Kong races for which full quinella data was available. The
quinella odds are shown on a big screen at the Hong Kong racetrack. The quinella pool is the largest in
Hong Kong and the track take is 17%. Busche and Hall (1988) and Busche (1994) found no evidence of
the favorite-longshot bias in the Hong Kong win market. This was further confirmed by Bacon-Shone,
The formula in (9) assumes that our wagers do not influence the odds. For small wagers or large
pools, this is unlikely to present a problem in practice. However, when our bets are fairly large relative
to the size of the pools, then bets based on (9) are too large. Smith and Ziemba (1986) have analyzed this
problem. They recommended lowering your wager by x% if you have bet x% of the total pool.
PRICING EX(YTIC RACETRACK WAGERS 48 1
Lo and Busche (1992a). Hence, to estimate the win probabilities, the win bet fractions are used directly
without any correction. For estimating the ordering probabilities, Bacon-Shone, Lo and Busche (1992b)
show that the Henery model (Henery (1981)) fits the Hong Kong data better than the Harville model
(Harville (1973)). The Harville model overestimates (underestimates) ? T i~ f j is a favorite horse (longshot).
Nevertheless, both models are used to compute the ordering probabilities rts. To screen out the
longshots, we concentrate only on those horses with win odds of 8-1 or less. In addition, a 15% edge is
used. With initial capital of US.$ 10,OOO, final capitals increased to $109,532 and $68,217 using the
Harville model and approximated Henery model, respectively. The betting histories are shown in Figure
I*.
Quinel l a B e t i n Hong Kong, 1989

C369 races)
250 ,
0 100 2.30 300

r a c e number
-Random betting +Harvi I le ~ A p p r o xHenery
Figure 7: Application of the betting strategy in Quinella Bet in Hong Kong
The Harville model does somewhat better in this case, but this analysis is not based on a large
sample. The two major combinations (the winning horses in races no. 172 and 280 in Figure 7) provided
much of the profits in the betting histories. Both involved extreme favorites. With the overvaluation of
ordering probabilities for favorites by the Harville model, it is clear that more will be wagered on the
favorites and, thus, it is not surprising that the Harville model does better in this case. In conclusion, our
system appears to be beneficial to those bettors interested in Hong Kong quinella market.
Following HZR (1981), the straight line in Figure 7 is the approximate wealth history for random
betting, where the total bet amount is the same as that under the Harville model. The total dollar bet
using the Harville model is $ 251,455 and the track take is 17%. Thus the final wealth level is 10,000 -
0.17(251,455) = -$ 32,747.35 (which should actually be zero in practice).
482 D. B. HAUSCH, V. S . Y. LO AND W. T. ZIEMBA
4. Concludinv remarks
This paper proposes a practical method for pricing exotic bet wagers. Starting with estimates of
win probabilities based on the odds in the win market, the required ordering probabilities were
constructed. For quinella wagering, the system is tested on a sample of Hong Kong data.
The advantages of the "Kelly criterion" are well known in the literature. However, the optimal
fraction of capital bet on the horses may be very large in some cases, even when the probabilities of
profits are very small, such as in triactor bets. It may take a long time to recover the loss. To reduce the
risk, the fractional Kelly criterion developed by MacLean and Ziemba (1991) and McLean, Ziemba and
Rubinstein (1992) is an alternative that balances the tradeoff between risk and return. This method simply
invests a fixed fraction of the optimal bet amount determined by the original Kelly criterion. Risk can
also be reduced by increasing the edge in (7).

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Pricing Exotic Racetrack Wagers

Donald B. Hausch, Victor S.Y.Lo and William T. Ziemba

School of Business, University of Wisconsin.

Management Science Division, Facdty of Commerce,

Management Science Division, Faculty of Commerce,

University of British Columbia. Vancouver BC, Canada V6T IZZ

2. Efficiency of the Win Market

Rates of R m u n on B I ~ J10 Win by Grouped Oddr. Take Addcd Bark

Study 0.75 1.23 23 5.0 75 10.0 15.0 33.0

'Track Odds (Log Scale)

.- estimate of ~e c.'ancr of ,winning

Tryk odds (Log Scale)

Quoted Pdiustment Effective Track Pavback

9-5 1.80 1.99 6.2 89.9 88.2

2-1 2.00 2.49 6.1 89.8 88.1

3. Pricing exotic waeers

offered price of a $2 wager - 2(0+1) t 2(1+E) . (7)

Exotic M Odd. (0) CTdCrirg P#imr.ts of p

Wly doubk O,(i=l,._.. 0,:

Table 4: Formulas of the Orcering Probabilities for irious Exotic Bets.

Quinel l a B e t i n Hong Kong, 1989

0 100 2.30 300

Figure 7: Application of the betting strategy in Quinella Bet in Hong Kong

also be reduced by increasing the edge in (7).

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