How Tracks Determine Horse Odds
The most common form of betting on horse racing is known as pari-mutuel betting. This means that all of the bettors are competing against each other, looking to take a share of the total pool of money betted. The odds are determined by the bets that have been placed, just like we learned about in the Markets and Information section of the class (Chapter 22). The track that takes these bets, usually take a cut of about 10 to 20% so that they can make a profit. The remaining money is then paid out to the winning bettors.
As highlighted in class, calculating horse racing odds is not very complicated. Take a five horse race for example where the track has taken a total of $1,000 in win bets, $300 on Horse A, $250 on Horse B, $200 on Horse C, $150 on Horse D and $100 on Horse E. Suppose the track takes a 20% cut, so the remaining money in the pool is $800. The odds for each horse are calculated by subtracting the amount bet on that horse from the available payout pool ($800 in this case) and dividing that difference by the amount bet on the horse.
In this case:
Horse A’s odds would be (800-300)/300 = 5/3
Horse B’s odds would be (800-250)/250 = 11/5
Horse C’s odds would be (800-200)/200 = 3/1
Horse D’s odds would be (800-150)/150 = 13/3
Horse E’s odds would be (800-100)/100 = 7/1
Bettors should always bet their beliefs, and due to the cut the track takes, the inverse odds are usually higher than the horses theoretical true win probability.
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