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Why Lowering Takeout Increases Handle 100 out of 100 Times

@righthind tweeted out a great link this morning, a research paper titled - "How Do Prior Gains and Losses Affect Subsequent Risk Taking? New Evidence from Individual-Level Horse Race Bets."

One of the conclusions:
  •  The “house money effect” [shows that] bettors ..... mostly spend the money they have won.
This means what it says - when you are making gains, you bet most of what you've won. This behavior is often linked to the "break even effect", which is a way of saying the vast majority of people will bet at a slot machine until their original $20 is gone.

This is, in fact, a big reason why slot machines were taxed, at one time, at 25% juice, but this rate went lower and lower. The people playing to break even were not enjoying themselves at 25% and the casino was not making as much as it should've been.  At 5% you had a whole lot of people on the floor chasing break even. Chasing is maximizing utility.

This theory is relatively simple, and it's not solely used for racing, or slots.

In finance, Tobin's Q is (loosely) the market value of a stock divided by the firm's replacement value. Companies with a low Tobin's Q use the house money effect to chase gains, and even when they have minor losses in a given year, will increase their risk, chasing break even the following year. Companies with a high Tobin's Q do not exhibit this behavior.

In racing, low Tobin's Q users are your casual user. People like to say "they don't care about takeout" but they do, because they always know where they are when it comes to break even, and when they have (or don't have) house money. Higher takeout moves them away from break even, and in response, over time they leave the market.

This is also why, in my view, jackpot bets are so terrible for the casual bettor. When you take a bunch of a user's money and tie it up, they can't exhibit the behavior they are predisposed to exhibit. Then, adding to the deleterious effect, jackpot money is not spread out for masses to chase break even, it's sent to one winner and he or she puts much of that money away.

When I type, as I often do here, "people don't take their incremental winnings and stick them in a sock" this is what, more or less, I am referring to.

When you give people more back for them to bet, they bet. This is why, 100 out of 100 times, takeout rate decreases increase handle.

Comments

Sal Carcia said…
The elephant in the room here is the computer aided wagers. The computer players increase the effective takeout for the other players by 2% or more. They also contribute to driving other players away. And the computer players do not put their winnings back into the pools. In essence, they are skimming the pools.

This type of play also results in sudden drops in odds just as the race starts or even during the race. Whether this is just a perception issue or not, it frustrates the regular players. It is no wonder why many players are trying to escape into pools like the jackpots where at least they believe they are sheltered from the computer wagers.
Pull the Pocket said…
Sal,

With respect, there's no need to complicate this. The 0.66%-1.5% takeout increase from rebate or "computers" pales in comparison to 30% takeout rates at some tracks.

Sometimes the elephant is the elephant.

PTP
Sal Carcia said…
There was an uproar when Santa Anita raised their takeout by 2%. Why would it be any different when the computer players raise it by the same amount? And we know the computer play does not churn as much as regular play.
Herschel Bird said…
You are giving computer players far too much credit. The best of them would be quite happy (and very very rich) if they can break even parimutuelky and just win the rebates; in fact many programs are geared to lose 3-5% in the pools just to get those fat rebates. Computer players are not net winners in the pools; they make their profits from the simp outlet share.