Thursday, December 4, 2008

Changes In Behavior

The first study I did for Thoroughmetrics compared the success of horses that had been sold at yearling auctions against the success of those that were sold at two year old in training auctions. What I found was that there was a drastic difference. Not only did those in one of the types of auctions perform better overall (and at all price levels), but the performance was more predictable too...there was a much stronger relationship between price level and performance. Really valuable information for anyone spending hundreds of thousands of dollars (or more) per year at auctions of unraced horses.

That said, it recently occurred to me that there's a real problem with studies which look at any human behavior that changes drastically over time. In this case, the conclusions of the study will only be valid as long as buyers use the same criteria to make their decisions about what a given horse is worth, and as along as sellers enter the sames types or quality of horses in each type of auction that they did at the time of the study.

A similar problem exists with any data on the return on investment (ROI) of any handicapping system. Data gathered on the ROI will only be predictive as long as handicappers as a group don't change how they make decisions about how to allocate their money to horses with various characteristics. So although ROI is what the handicapper ultimately cares about, it is also one of the least stable measures to look at.

For handicappers, the solution is to actually create a 'line' based on the key characteristics of the horse. If you know what the odds on a given horse should be, you only need to compare those to the actual odds to know if a bet has a positive expectation. So instead of thinking something like "lone speed in a 6F race on average returns $2.30 for every $2.00 bet, so I'll bet on #4", handicappers should be thinking along the lines of "lone speed in a 6F race increases a horse's chance of winning by 15%...let's see if that makes #4 a good value at his current odds".

This type of change in thinking applies to ownership as well. Instead of doing studies that focus on general measures that change (like which type of auctions provide the best value), we're better served by looking at more stable measures. For example, if we find that offspring of AP Indy on average receive Beyer ratings 2 points higher in their races than offspring of Silver Charm, that's not affected by changes in human behavior (unless you think that there's a systematic change in how Beyers are being subjectively adjusted over time). So instead of simply knowing which type of auction tends to provide better value, we could go into any auction and evaluate what each horse is worth based on their Beyer ratings, and whether they're a good value based on the bidding.

I realize that in essence I'm saying that most people have the right approach, and that while the findings of my original study were valuable, they will become less valuable over time as behavior changes. However, where most people go wrong is that they judge each horse's value subjectively, or using flawed statistics that don't have much predictive value. It doesn't help to judge individual value, if you don't have a valid model for valuation.

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