Of Horses and Men

Thinking about placing a bet on the Melbourne Cup tomorrow? If so, you can expect to lose money. But if you want to lose less (in a probabalistic sense), then you should bet on short-odds horses rather than longshots. According to my friend Justin Wolfers, the expected rate of return on a 1/2 horse is about -10%, while the expected rate of return on a 100/1 horse is about -60%. That’s not to say that longshots never win; merely that they win even less often than their odds would lead you to predict.

On the other hand, if you want to have a flutter, you should think about placing a bet on the other big event tomorrow – the RBA’s decision on whether to raise rates. You can do that in the stockmarket, where the expected returns are positive, not negative.

About these ads
This entry was posted in Economics Generally. Bookmark the permalink.