Monday, December 10, 2012

Perfectly Rational

For border residents it is a common sight. If gas is $5.50 a gallon at home, but you can drive across a border, ten minutes away, and get the same gas at $3.85, you go across. If you have a double tanked Durango, even better. You have shoppers at a US Costco with B.C plates buying so much gas and milk the police have to be called. You have online shoppers looking for a deal, or people crossing a state border to gamble legally. You have people who make big money leaving France or England to go next door to escape new wealth taxes.

It's not because people hate their state or country, because they dislike the customer service at their gas station, or are really peeved at the cow farmer down the road. It's not because they're greedy meanies. They are simply acting rationally, like most of us act in a free market system.

I saw a tweet yesterday from one of my favorite people on twitter saying "if you are at the track don't bet on mobile with an ADW, because horsemen and the track get less money".

That's very true - they do get less money. The ADW gets a cut if you bet at your ADW.

Let me preface this by saying that I always bet at a teller or betting machine on track. I choose to do that. But it doesn't always make the track and purses the most money. Why? Because for me, and many other bettors it is the irrational thing to do. And when we do the irrational, we're not maximizing our utility. 

For someone who bets at an ADW all they are doing is crossing the border to get $4 gas instead of $5 gas - but in gambling it is much more than that. If you are buying cheap gas you are getting a rebate and lowering your juice. If your betting ROI with rebate (betting in an ADW) is 1.03, but without it, you are at 0.97, it represents a monster difference.

A 1.03 bettor can bet tens of millions of dollars a year. A 0.97 ROI bettor would likely bet less than $100,000. This can work with 0.90 and 0.84 ROI's or 0.96 and 0.90 ROI's, on a sliding scale. The lower your ROI, the fewer dollars you bet.

Acting irrationally (for those bettors whose bottom line ultimately drives them) simply results in them consuming less of your product.

I go to the track (most times) with a professional bettor who bets a lot of money and has a very high threshold for risk. When we go on track he bets into the pools, as do I, right at the wicket or betting machine. His handle when we go? I don't think I've ever seen him bet more than $100 in an afternoon or evening. 

It's similar in track owned ADW's. I have one, and I bet peanuts into it. I am not getting an edge, so I simply can't play racing there seriously. I don't spend hours and hours a week trying to win money by sabotaging myself. That's irrational.

Those of us who play in ADW's do so not because we dislike racing, horses, the people who work with them, or track executives. Most of us are horse owners and friends with these folks. It's simply done because we are rational and being rational allows us to maximize utility, resulting in us enjoying the game of horse betting and the sport more (and betting more, adding more gross dollars for profits and purses than if we bet less).

The lineup of people acting rationally betting the races is as long as the lineup of Canadian cars for $3.50 gas at a Washington state Costco. It's nothing out of the ordinary. It's a perfectly expected outcome.


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