Melbourne Cup: Understanding the Odds

If your betting experience for The Race That Stops A Nation involves picking jockey colours, lucky numbers, or funny horse names, you don't need to read this.

Actually, read it anyway. I need the hits.

For everyone else, this is basically how it all works.

Also how it works.

Creating a book is based on probabilities. The maths is quite simple:

ODDS = (1/PROB)*100

So if the bookie thinks a horse is 50% likely to win (even money), the basic calculation for odds is:

ODDS = (1/0.5)*100 = $2

So you bet $1, you get your $1 investment back plus $1 in winnings.

Here is an actual example, using the Melbourne Cup 2017 field as of Monday morning:

Note (in red) that the total probability of all outcomes adds up to 118.12%.

But everyone knows the number of possible outcomes can't be more than 100%!

And so we've just learned how bookies make money. And they make more on the Melbourne Cup than just about anything else, where the normal edge is 103-107%.

As well as stacking the deck like this, bookies definitely know way more than you about whatever you're betting on, and that they can also lay bets with other bookies to hedge losses.

It's a mugs game, basically.

So after you ignore the rational outcome that you will almost certainly lose, and are looking at the Melbourne Cup field and form guide with your inferior knowledge, what is the (not actually) smart bet? Favourites? Long shots?

The answer is any horse with positive expected value (EV).

Positive EV is where you think the likelihood of an outcome is greater than what the odds are saying.

For example, in our even money example above, the odds are $2 and the probability is:

PROB = (1/2) = 0.5 (or 50%)

But if you think the horse is a 60% chance of winning then there is a positive EV for the bet.

A way of thinking about it is that if you replayed the event hundreds or thousands of times, you will make money betting in that situation.

By contrast, you might think that horse is only a 45% chance of winning. That is negative EV, and you should avoid making that bet.

Note the 45% negative EV horse may still be the horse you think wins most often. But gambling isn't about picking winners, it's about picking the most profitable situation.

So how do you work out EV?

You need to do lots of research, understand a lot of information, and you also need to look at the very long-run. Essentially take all the thrill and excitement out of gambling and turn it into a boring mathematical job. Then you guess anyway.

So maybe it is best to stick with the colours, numbers and names.