For those of you who are horse racing fans, you know that a wealth of information is available to guide your betting selections. In an interesting paper published in the Southern Economic Journal (free version available here), economists Brian Chezum and Bradley S. Wimmer provide evidence that bettors also use principles from economics in their wagering.
Thoroughbred horse breeders can elect to sell the horses they breed, race the horses themselves, or a mix of the two. Chezum and Wimmer note that this creates a classic adverse selection situation. Breeders have the best information about whether their horses have good future racing prospects. Of the breeders who both sell and race their horses, which horses would we expect them to sell and which would we expect them to keep to race themselves? We’d expect them to keep the best ones for themselves and sell the less promising ones.
Chezum and Wimmer examine the post-time odds from two-year old maiden races at Saratoga and Keeneland and find that horses who are raced by their breeders have lower odds (bettors favor them) than otherwise similar horses have. Bettors appear to recognize the adverse selection issue and believe that horses raced by their breeders are of higher quality. So, here’s one more benefit from taking a managerial economics class or just reading a managerial economics text. Learn to bet like the pros!
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