Introduction to Economics and Mathematical Insights

Donald B. Hausch, Victor S. Y. Lo and William T. Ziemba
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Donald B. Hausch: University of Wisconsin-Madison, USA
Victor S. Y. Lo: University of British Columbia, Canada
William T. Ziemba: University of British Columbia, Canada

Chapter 12 in Efficiency of Racetrack Betting Markets, 2008, pp 87-91 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe earlier sections of this book have primarily dealt with positive analysis contributions to the horseracing literature. This section begins our discussion of normative analysis. We start with the original paper in this area, Isaacs (1953)1, where our bettor is assumed to know the true win probabilities in the horserace and wishes to maximize expected profit. Isaacs accounted for our bettor's effect on the odds and developed an ingenious algorithm to determine the optimal wagers. The remainder of the papers in this section consider three extensions of Isaacs model. First, Isaacs assumed risk neutrality while Breiman (1961)2 (extending Kelly (1956)2) showed that the rate of growth of wealth is maximized, asymptotically, by assuming a logarithmic utility function. Second, Isaacs' model takes win probabilities as given; estimating these probabilities can involve fundamental methods (which are discussed here and in many popular trade publications) and technical schemes (which are considered in Section 4). Third, Isaacs' restriction to win betting can be extended to place, show and exotic wagering with ordering probability estimates. These three important extensions are now discussed in some additional detail…

Keywords: Racetrack Efficiency; Racetrack Betting Market; Racetrack Betting; Win Market; Finance (search for similar items in EconPapers)
Date: 2008
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