Tuesday, December 18, 2007

Racehorse Economics 101

We often hear commentators say "horse racing should be run like a business", and that it is not. There are myriad topics we can go to for that, but one: Racehorse value, is perhaps interesting from an economics perspective.

If you own a lemonade stand and generate $5000 of income, your asset is priced at X. If suddenly a shock comes, and your business is not perfectly competitive and earning power is allowed to rise, your asset will be priced higher, at X+.

With slots being introduced, purses rose across all classes, from the Open to lowest level claimers. In racing the higher level horses - conditioned ones or stakes horses - had their capital cost appreciate as it should be. Try buying a decent maiden horse now who looks good, or a horse like Big Business through a sale. It acts like a lemonade stand, and asset price rises.

The disconnect comes in claiming, because the asset always stays priced the same, regardless of earnings power. If a 5 claimer in 1960 races for $700, his price is $5000. If, with slots, the horse might now race for $8000, he is still priced at $5000. This encouraged "quick hit"claiming, more popularly known as "rent-a-horse" where you claim and then drop and still make money. It dramatically changed the economics of horse racing, and did so artificially.

Thoroughbred racing, in the best interest of the horse and the sport, instituted jail time in claiming long ago, to combat this economic disconnect. In Ontario, we too have this rule and in most circles it is accepted as a good one, which helps horses stay longer with one stable, and allow them to last longer and race more starts. You must either sit out to race in the same class, or are forced to raise the horse in class to race next week. In effect we are artificially suppressing demand and trying to shuffle capital to another area. This is of course a worthwhile pursuit, since claimers are like stocks and why stock selling and buying are not included in GDP calculations. That is, selling them and buying them just exchanges money, it does not add new money.

Is the rule restrictive like it sounds, or much ado about nothing? Well, one thing we know for sure, stats are hard to come by in this business. But fortunately with the Internet we sometimes find some gems. One poster on harnessdriver.com and long-time horse owner did a little study on claiming, through his old racing programs from the 1980's. He scoured them for claims, and then logged what the trainer and owner did with those claims, with the absence of any rule whatsoever. The result: Out of 169 claims on an A track, 135 of them were raised in class while the other 34 were dropped, or let race in the same class. These numbers are not a whole lot different to what happens today!

It is not often in racing where we can say that a piece of legislation does exactly what it was prescribed to do. But in this case we can. It has bridged an economic disconnect caused by an outward shock (slots) and made it how it used to be. It's flat out amazing how well it has worked!

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