Saturday, June 11, 2005

Doesn't Steven Levitt

...believe in efficient betting markets? Apparently not:
My Preakness picks were not as terrible as usual - I correctly had Afleet Alex to win, but missed my exactas. I guess they were good enough that some readers wanted my Belmont picks. Well, actually only one reader, but I'll take that as a mandate.

Anyway, I like Afleet Alex. I think he will be an odds-on favorite, like probably 3-5, although the morning line odds have him listed at 6-5. Even at odds as low as 3-5, I would bet him. Very heavy favorites, on average, are the highest return bets you can make in horse racing, although they stilll have negative expected value if you bet them all. Afleet Alex has low variance in his past performances, which in my experience, is a positive predictor of success for big favorites.

I definitely would not bet an exacta with Afleet Alex and Giacomo, even though they seem to be the two best horses in the race. Everyone and their brother will bet those two in an exacta and the payoff will be pathetic. If I were to bet an exacta box it would be Afleet Alex and Andromeda's Hero who will be about 20-1.
If there is complete information, the expected payoff of every possible bet should be exactly the same. Otherwise, there would be an arbitrage opportunity.

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