The Melbourne Cup has been run and won and we hope you had a win yourself.
More likely, you didn’t. After all, it’s rare to see a poor bookie. While we don’t want to take the fun out of everything, basic mathematics tells us that gambling ‘customers’ are more likely to lose than win. If that wasn’t the case, the gambling industry couldn’t exist.
There is a story of a little boy and a little girl whose dad took them to the races one-day. Dad was a financial adviser, and he told them each that they could have five dollars to bet on horses. The little boy immediately piped up “can I just keep the five dollars?” Proudly, Dad said yes. After all, the surest bet is the one you never make. Not to be outdone, the little girl decided to only back horses that were paying at least 100 to 1. She realised she would probably not win, but rationalised that if she was going to win she might as well win big. Dad had a great day!
The way that odds are set in a horse race is very similar to the way in which premiums are set in life insurance. In horse racing, the bookie sets the odds so that the total amount that he or she receives from punters exceeds the total amount that he or she may have to pay out if any given horse wins the race. They do this by assessing how much is being bet on each horse and setting the odds accordingly. The more people backing a particular horse, the lower the odds – which is why the horse with the lowest odds is known as the ‘favourite.’ It’s the one that most people are backing.
In the ‘old days,’ when the bookie had to use his or her head to work out the odds, the punter could stand a bit of a chance of finding a ‘good price’ – that is, finding a horse for whom the odds were in the punter’s favour. These days, as gambling has moved online and the odds are calculated by a computer, that can no longer really happen. Instantly, the online gambling facility calculates all the potential payouts on all potential results of the race and sets the odds accordingly. The bookie is almost guaranteed to win.
Remember that next time you are tempted to make a bet.
In racing, the amount bet is typically the same, but the amount paid out if you win varies according to the odds you pay. So, if you bet $10 on a horse that is 10 to 1, you receive $100 if that horse wins. If you bet $10 on a horse that is 20 to 1, you receive $200 if that horse wins.
With insurance, this gets flipped a little bit. You nominate how much you want the payout to be, and the insurer tells you how much you need to bet. You might decide that you want $500,000 to go to your loved ones if you die. The insurer will look at all the variables and then set a premium for you. These variables can be personal and related to you – things like your health, your age, your gender and your income. They can also have nothing to do with you: things like how many other people have taken out policies through that insurer, and how likely each of them is to make a claim. This second part is a bit like the bookie considering all the other bets that he or she has taken before setting your odds.
There is, of course, one critical way in which gambling and life insurance are different. In life insurance, you hope you never get a payout! That’s why life insurance makes a lot more sense than punting on horses. You will probably lose either way. But, with insurances, you are making a bet you don’t want to win!