Maybe it’s currently a good weight or a good age.

If enough people bet, we might expect the pari-mutuel odds to settle down
to a “fair” value, which reflects the horse’s true chances of winning. In
other words, the betting market is efficient, bringing together all the
scattered bits of information about each horse until there’s nothing left
to give anyone an advantage. We might expect that to happen, but it doesn’t.
When the tote board shows a horse has odds of 100, it suggests bettors
think its chance of winning is around 1 percent. Yet it seems people are often
too generous about a weaker horse’s chances. Statisticians have compared the
money people throw at long shots with the amount those horses actually win
and have found that the probability of victory is often much lower than the
odds imply. Conversely, people tend to underestimate the prospects of the
horse that is the favorite to win.
The favorite-long-shot bias means top horses are often more likely to win
than their odds suggest. However, betting on them isn’t necessarily a good
strategy. Because the track takes a cut in a pari-mutuel system, there is
a hefty handicap to overcome. Whereas card counters only have to improve on
the Four Horsemen’s method, which almost breaks even, sports bettors need
a strategy that will be profitable even when the track charges 19 percent.
The favorite-long-shot bias might be noticeable, but it’s rarely that
severe. Nor is it consistent: the bias is larger at some racetracks than at
others. Still, it shows that the odds don’t always match a horse’s chances
of winning. Like blackjack, the Happy Valley betting market is vulnerable
to smart gamblers. And in the 1980s, it became clear that such vulnerability
could be extremely profitable.

HONG KONG WASN’T WOODS’S first attempt at a betting system for horse racing. He’d
spent 1982 in New Zealand with a group of professional gamblers, hoping that
their collective wisdom would be enough to spot horses with incorrect odds.
Unfortunately, it was a year of mixed success.
Benter had a background in physics and an interest in computers, so for
the races at Happy Valley, the pair planned to employ a more scientific
approach. But winning at the racetrack and winning at blackjack involved very
different sets of problems. Could mathematics really help predict horse
races?
 A visit to the University of Nevada’s library brought the answer. In a
recent issue of a business journal, Benter spotted an article by Ruth Bolton
and Randall Chapman, two researchers based at the University of Alberta in
Canada. It was called “Searching for Positive Returns at the Track.” In the
opening paragraph, they hinted at what followed over the next twenty pages.
“If the public makes systematic and detectable errors in establishing the
betting odds,” they wrote, “it may be possible to exploit such a situation
with a superior wagering strategy.” Previously published strategies had
generally concentrated on well-known discrepancies in racing odds, like the
favorite-long-shot bias. Bolton and Chapman had taken a different approach.
They’d developed a way to take available information about each horse—such
as percentage of races won or average speed—and convert it into an estimate
of the probability that horse would win. “It was the paper that launched a
multibillion dollar industry,” Benter said. So, how did it work?

TWO YEARS AFTER HIS work on the roulette wheels of Monte Carlo, Karl Pearson met
a gentleman by the name of Francis Galton. A cousin of Charles Darwin, Galton
shared the family passion for science, adventure, and sideburns. However,
Pearson soon noticed a few differences.
When Darwin developed his theory of evolution, he’d taken time to organize
the new field, introducing so much structure and direction that his
fingerprints can still be seen today. Whereas Darwin was an architect, Galton
was an explorer. Much like Poincaré, Galton was happy to announce a new idea
and then wander off in search of another. “He never waited to see who was
following him,” Pearson said. “He pointed out the new land to biologist, to
anthropologist, to psychologist, to meteorologist, to economist, and left
them to follow or not at their leisure.”
Galton also had an interest in statistics. He saw it as a way to understand
the biological process of inheritance, a subject that had fascinated him for
years. He’d even roped others into studying the topic. In 1875, seven of
Galton’s friends received sweet pea seeds, with instructions to plant them
and return the seeds from their progeny. Some people received heavy seeds;
some light ones. Galton wanted to see how the weights of the parent seeds
were related to those of the offspring.
 Comparing the different sizes of the seeds, Galton found that the
offspring were larger than the parents if the parents were small, and smaller
than them if the parents were large. Galton called it “regression towards
mediocrity.” He later noticed the same pattern when he looked at the
relationship between heights of human parents and children.
Of course, a child’s appearance is the result of several factors. Some
of these might be known; others might be hidden. Galton realized it would
be impossible to unravel the precise role of each one. But using his new
regression analysis, he would be able to see whether some factors contributed
more than others. For example, Galton noticed that although parental
characteristics were clearly important, sometimes features seemed to skip
generations, with characteristics coming from grandparents, or even
great-grandparents. Galton believed that each ancestor must contribute some
amount to the heritage of a child, so he was delighted when he heard that
a horse breeder in Pittsburg, Massachusetts, had published a diagram
illustrating the exact process he’d been trying to describe. The breeder,
a man by the name of A. J. Meston, used a square to represent the child, and
then divided it into smaller squares to show the contribution each ancestor
made: the bigger the square, the bigger the contribution. Parents took up
half the space; grandparents a quarter; great-grandparents an eighth, and
so on. Galton was so impressed with the idea that he wrote a letter to the
journal Nature in January 1898 suggesting that they reprint it.
 FIGURE 3.2. A. J. Meston’s illustrationof inheritance.

Galton spent a good deal of time

thinking about how outcomes, such as
child size, were influenced by
different factors, and he was meticulous
about collecting data to support this
research. Unfortunately, his limited
mathematical background meant he couldn’t
take full advantage of the information.
When he met Pearson, Galton didn’t know
how to calculate precisely how much
a change in a particular factor would
affect the outcome.
Galton had yet again pointed to a new
land, and it was Pearson who filled it with
mathematical rigor. The pair soon started
to apply the ideas to questions about
inheritance. Both viewed regression
to the mediocre as a potential problem:
they wondered how society could make
sure that “superior” racial
characteristics were not lost in
subsequent generations. In Pearson’s view,
a nation could be improved by “insuring that its numbers are substantially
recruited from the better stocks.”
 From a modern viewpoint, Pearson is a bit of a contradiction. Unlike many
of his peers, he thought men and women should be treated as social and
intellectual equals. Yet at the same time, he used his statistical methods
to argue that certain races were superior to others; he also claimed that
laws restricting child labor turned children into social and economic burdens.
Today, that’s all rather unsavory. Nevertheless, Pearson’s work has been
hugely influential. Not long after Galton’s death in 1911, Pearson
established the world’s first statistics department at University College
London. Building on the diagram Galton had sent to Nature, Pearson developed
a method for “multiple regression”: out of several potentially influential
factors, he worked out a way to establish how related each was to a given
outcome.
Regression would also provide the backbone for the University of Alberta
researchers’ racing predictions. Whereas Galton and Pearson used the
technique to examine the characteristics of a child, Bolton and Chapman
employed it to understand how different factors affected a horse’s chances
of winning. Was weight more important than percentage of recent races won?
How did average speed compare with the reputation of the jockey?
Bolton’s first exposure to the world of gambling had come at a young age.
“When I was a toddler my Dad took me to the track,” she said, “and apparently
my little hand picked the winning horse.” Despite her early success, it was
the last time that she went to the races. Two decades later, however, she
found herself picking winners once again, this time with a far more robust
method.
The idea for a horseracing prediction method had taken shape in the late
1970s, while Bolton was a student at Queens University in Canada. Bolton had
wanted to learn more about an area of economics known as choice modeling,
which aims to capture the benefits and costs of a certain decision. For her
final-year dissertation, Bolton teamed up with Chapman, who was researching
problems in that area. Chapman, who had a long-standing interest in games,
had already accumulated a collection of horse racing data, and together the
pair examined how the information could be used to forecast race results.
The project was not just the start of an academic partnership; the researchers
married in 1981.
Two years after the wedding, Bolton and Chapman submitted the horse racing
research to the journal Management Science. At the time, prediction methods
were growing in popularity, which meant the work received a lot of scrutiny.
“The paper spent a long time in review,” Bolton said. The research eventually
went through four rounds of revisions before appearing in print in the summer
of 1986.