Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 29

That’s racing: financial markets and wagering parallels

My first real experience with risk management was working as a penciller for a bookmaker during my university days. Back then, there were no laptops and the book was actually a real book, not an Excel spreadsheet. The punter would receive a ticket with a largely illegible scrawl indicating details of the wager and hope (if collecting) that the ticket could be translated.

Bookmaking and market parallels

It struck me there are many  parallels between the bookmaking industry and the financial services sector. No doubt a number of participants will gasp in horror at this assertion. ‘Parallels’ may be too strong a contention but perhaps there are some things we can learn from the world of professional wagering and apply to financial services.

For each race we would frame a field with risk (loss) parameters and initially set our board with unduly ‘expensive’ odds. These odds would be adjusted on the basis of betting patterns to attract or dissuade further bets, and an ultimate percentage book set just before the start reflecting preferred risk and return (an efficient frontier maybe? – the first parallel).

For those unfamiliar with the art of bookmaking, each set of odds is converted to a theoretical win percentage, so 3/1 represents a 1 chance in 4 of winning which equals 25%. A book is the cumulative total of odds offered and the theoretical ‘win’ rate is that percentage over 100. However, this makes certain assumptions about betting trends and how the book is weighted.

Data analysis is the second parallel. If there is one place where the amount of publicly available data is close to that of financial markets, it’s the form guide. I can find out how each horse has run under various conditions, with different weights, over multiple distances (with subsequent breakdowns over and within these distances), with a variety of experienced jockeys. If horses were an asset class, I could do a plethora of relative value analyses, which is actually what the bookies do to set odds in the first place – the third parallel.

So, surely this should allow me to make a fully informed decision when betting. Quite possibly, but does fully informed mean successful? Punters (wrongly) believe so. As we’ve seen, it’s how you interpret and what you do with the numbers that matters.

Take the Melbourne Cup. The bookies love it. It is one of the most difficult races to predict as evidenced by the odds on offer. Yet annually, as surely as Xmas comes, every person becomes an expert for the day. Given the amount of (not so smart) money wagered, Xmas does indeed arrive in November for the bookies as they can work their odds far better than when ‘plunges’ or a lack of diverse bets arrive.

“But,” I hear you say. “You must overlay the data with the vagaries of animal instinct - the horse just doesn’t get it or jockey’s poor judgment.” Quite true, but is this a fourth parallel to financial services? Is that akin to when stock pickers (or economists or macro analysts etc) overlay their own expertise after analysing the multitude of data available? Tosh – such facetiousness.

So let's put odds on financial forecasts

Perhaps though, an interesting exercise could be to ask analysts to add a ‘confidence weighting’ (i.e. odds) to their price target or call. I know for certain their number will be either right or wrong (so zero or 1 probability) but the real probability of accuracy lies somewhere in between.

That however doesn’t preclude and possibly invites some neat Bayesian inputs whereby the analyst can suggest ‘odds of X’ that the price target or number will be achieved. One would intuitively think these indications should be odds on given a coin toss is an even money bet. Analysts could change their odds subject to new inputs. They already change their price targets regularly.

Why not extend this to those wonderful business news articles where a cross section of experts is asked to opine on every main economic and financial indicator in the next 12 months? Please add odds so we can see how well you rate your form.

Consider the implications. One could start to follow an expert with far more confidence based on their form. An ‘outsider’ might be considered if they show some relative movement in form and we agree that all things mean revert eventually.

Moving from parallels, here’s what I consider the main difference between the bookies and the financial experts. If the former gets his efficient frontier and relative value analysis wrong, he loses his own money. Now, I am not suggesting that the complexities of financial forecasting and analytics be subject to individual penalties for experts being wrong but conversely, shouldn’t there be some degree of accountability? Particularly if they are wrong to a very meaningful extent. Perhaps the Form Guide for Financial Expertise? We would definitely have the data.

And we should extend this discussion in “That’s Racing Part 2: Revenge of the Disaffected Banker”  to the ability of asset consultants to pick the best managers for asset classes.

But such an idea would be hobbled before it reached the finishing line.

 

Paul Umbrazunas worked for a bookmaker whilst at university before a long career in financial markets including debt capital markets, syndicate, ALM and Chief Operating Officer roles across Goldman Sachs, BZW, Deutsche Bank and Credit Suisse.

 


 

Leave a Comment:

RELATED ARTICLES

How can you not be bullish the US?

The role of financial markets when earnings are falling

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.