Monday, October 17, 2011

You Can't Regulate Risk

Mark Davies today wrote about a betting conference he was attending, where the afternoon topic was betting integrity. 

The session looked at somehow plugging an integrity hole, where Mark agrees it does more harm than good. You know the drill - there might someone, somewhere doing something to undermine the sport, so we must over-regulate the betting of the sport, or at the very least, shout it from the highest mountain.
  • But what concerned me about the session was the extent to which it – and so many sessions like it – served only to perpetuate myths which rapidly take on the status of fact in the public pysche. 
The example proponents used to further their case for some sort of betting regulation was a potential situation at next year's Olympics: An athlete who "might finish third in a heat, in order to save him/herself for the final." This is the exact same argument we see in racing, primarily about eliminations in harness. The colt or filly's driver might not try as hard because he too has to save the horse for the Final. Harness racing has tried over and over again to regulate eliminations in some way.

Resistance is futile, because like an Olympic athlete saving himself, this is baked into the price with a risk component. Bettors ain't dumb.

If Usain Bolt is 1.15 to win his elim on merit, but at a meet in this exact same situation last year he tanked the quarterfinals, his price will probably be 1.35. Some bettors will look at it as a bargain, some as too risky and make their plays. If Rock n Roll Hanover is in an elim and he is off four weeks with a bad post, he may be 4-5 instead of 1-5. Some will roll the dice at a 45% implied probability, some will look elsewhere.

I agree with Mark. There is no need to regulate something that is an intimate component of the off price. That's why it's called gambling.

1 comment:

Anonymous said...

It's a great observation that regulators of financial markets might want also to take seriously. There was a suggestion made last year by a US central banker - one of the smarter ones - that rather than try to directly regulate risk-taking by financial institutions, paying arbitrary bailout payments via taxpayer, you price the default risk by issuing "bailout bonds" which payout only in the event of default, the market value of which could also set a standard for reasonable tax funded bailouts. Anyways... onwards. Mark is one of the savviest people around on integrity and regulation, I hope people listen to him.