Transactions Costs, Extent of Inefficiencies, Entries and Multiple Wagers in a Racetrack Betting Model

Abstract

In a previous paper (Management Science, December 1981) Hausch, Ziemba and Rubinstein (HZR) developed a system that demonstrated the existence of a weak market inefficiency in racetrack place and show betting pools. The system appeared to make possible substantial positive profits. To make the system operational, given the limited time available for placing bets, an approximate regression scheme was developed for the Exhibition Park Racetrack in Vancouver for initial betting wealth between $2500 and $7500 and a track take of 17.1%. This paper: (1) extends this scheme to virtually any track and initial wealth level; (2) develops a modified system for multiple horse entries; (3) allows for multiple bets; (4) analyzes the effects of the track take and breakage on profits; (5) presents recent results using this system; and (6) considers the extent of the inefficiency, i.e., how much can be bet before the market becomes efficient?

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