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.

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