Horses, Racing, and Slot Machines

One of the most famous horse races in American history took place near Nashville, Tennessee in 1806.

A local lawyer, judge, gambler and slave plantation owner was trying to get out of debt. Andrew Jackson was profligate with his own wealth but a stern disciplinarian with slaves and horses. After losing heavily on prior champion, he saw the potential in Truxton and bought him to train.Truxton then took on the reigning Tennessee champion Greyhound in 1805. Truxton and Jackson won, "winning Jackson $5000 cash on the spot. Had he lost he might have been jailed for debt and sunk into poverty. His training of the horse had made the difference. Truxton also became a good source of revenue from stud fees. Thus Andrew Jackson became the best known horse trainer, racer and gambler in Tennessee." [Internet Biography of Andrew Jackson]

In 1806 Truxton beat a new comer, Ploughboy, by forfeit when Ploughboy went lame before the race. Debts incurred by the losers led to Jackson assaulting another lawyer, Thomas Swann. In hopes of recouping their losses, Ploughboy was run again against Truxton. This time it was Jackson's over-trained horse that was lame before the race. Jackson, possibly out of pride but probably for the money, ran Truxton anyway. Truxton won the first heat, but now both limped on his hind leg and had a lame front leg. To win the bet Jackson needed to win two of three heats, so Truxton and Ploughboy were forced to race again. Truxton won the second race, and is justly famous for it.

Andrew Jackson soon killed Charles Dickinson in a duel related to the Truxton race. Jackson went on to kill many white men and American Indians, win the Battle of New Orleans, create the Democratic Party, and serve for eight years as President of the United States.

Now it is as if Jackson's ghost is back to haunt us in our increasingly barbaric era. For the most part people who race horses love them. They are prized possessions that are well cared for. I see nothing inherently wrong in horse racing, as the horses themselves seem to like to race.

Yet in the last couple of years something has gone horridly wrong in the horse racing industry, which is supported by fans wagering on the races. Injuries to horses (and jockeys) were already unacceptably high two years ago, but they have grown at an alarming rate recently. At one race track alone, the Aqueduct in New York City, 30 horses have died in less than a year, doubling the number that died in the same period a year earlier. [New York Times, "Big Purses, Sore Horses, and Death," April 30, 2012] Typically the horses are not killed by the racing accident itself, but are put down afterwards.

Race tracks have been under business pressure for years. Thirty years ago they were one of the few legal forms of gambling in many states. As casinos proliferated across the states more and more gamblers abandoned horses for craps tables and slot machines. As a result the money available for purses (the prizes that go to the owners of the horses) declined, as did race track profits.

Most, but not all, states have now legalized attaching casinos to race tracks. There is a tendency for the horse racing to be an event that draws people to the sites, with the real money made from the 24/7 availability of slot machines. There are less horse breeders and trainers than there used to be 30 years ago when there was more money to be won. So to stage races the racetrack/casinos have started using casino profits to increase purses.

As a result winning purses has become more important than pride for many professional horse owners. They are doing the Andrew Jackson: training horses to the maximum, which helps them win races, but is also bad for their health and leads to accidents on the tracks.

No one in the industry wants to see injured horses. But clearly that is the consequence of the system that has evolved.

Free market theorists would probably suggest that the situation will resolve itself. Attracted by larger purses, more those who race horses will breed and train more. Then they won't need to race the older horses that are most prone to injury.

I believe the risk to horses should be minimized, while still allowing racing. The industry should not wait for a free market fix that may exist only in theory.

Whenever a horse has an accident the owner should get a hefty fine. The money should fund an independent organization that monitors the training of race horses and disqualifies owners that do not comply with humane standards. Greedy, cruel owners would then pay most of the bills for the monitoring system.

If the industry cannot regulate itself to insure a reasonable degree of safety and dignity for its horses, then local, state, and yes the dreaded federal government should establish regulations to protect the horses. Or we could just close the industry down.

Disclaimer: In the past I have done some paid consulting work for investors in the racing industry, mainly related to legal Internet betting on races. At this time none of my clients, to my knowledge, is invested in the industry.

Insurance and Casinos

Health insurance is the big issue of the moment. All kinds of politicians made all kinds of promises to all kinds of people during the 2008 elections, and now they are pretending to act on those promises. An improved health care insurance system was promised by many to many. My own expectations are low. But I am happy to debate the issue.

It helps to look at insurance in general, as well as looking at the specifics of insuring people's health.

And to understand insurance, you need to look at it outside the box. A good way to look at something outside its box is to take a look at a similar box, then compare and contrast. The ideal other box to look at, when considering insurance, is the casino, or gambling industry. This is not just my being satirical. It has to do with statistics and probability, which were originally studied and understood by considering games of chance.

Most people know, when they walk into a casino, that the casino is not really in the business of philanthropy. Casinos make money, they don't lose money. People suspend that knowledge by overriding it with another idea. They may get lucky. An individual, going to a casino and playing games of chance for any given period of time, may gain money.

But the money that individual makes is not, except in very unusual circumstances, a concern for the casino. Because other individuals, who are also there hoping to get lucky, are losing a whole lot more money than the individuals who are winning.

Casinos are set up that way. They were set up that way in ancient times before probability and statistics were developed forms of mathematics. Each game in a casino has a return ratio. Over a series of games, the individual outcomes have predictable percentages. This is most obvious in a roulette wheel, where each of the outcomes is equally lightly. Given that, for the casino to win over time the betting odds are simply set to slightly favor the casino. I won't go into the details, but you can find some at Roulette at Wikipedia.

Other games are more complicated, but work on the same principle. In poker the fact that the casino always wins is even more obvious, since a certain amount of each pot is raked off by the casino.

Insurance is remarkably similar. In its simplest form, it is a pool of money. Some people make money (they get more out than they put in); their are expenses for managing the money, and also profits taken out by the owners. As a result, most people get paid back less than they put in. You could argue that as with casinos, if people were rational no one would patronize an insurance company.

But the world is complex, and fear is a primal human emotion. There is an argument that some forms of insurance do make sense for the people who pay for them. This is because decreasing risk has a value to individuals.

Look at auto insurance, for instance. If you get into a car wreck the expenses from it could be enough to bankrupt most people. You probably won't get into a car wreck on any given day or even year, but there is a good chance you will get into one eventually. You fear bankruptcy, so you buy automobile insurance every year. It is expensive, and you are unlikely to come out ahead unless you get into a wreck (make that an expensive collision, not a fender bender) within a year or two after you first take out insurance. Yet it is worth it to many people because it protects them from being impoverished by a random event, an accident.

One can fairly ask, how much is it worth, this diminishment of risk? The auto insurance company has administrative expense and takes out a big chunk of the cash flow as profit to distribute to its investors. So all the people who buy insurance, together, will get paid back less than they pay in. Insurance companies hire actuaries to calculate their long term pay out risks, and set rates high enough to cover that plus administrative costs plus profits. Individuals are not in a position to hire actuaries. All they can do is shop for auto insurance, hoping to find the insurance company that takes the least bite out of the pie.

One other aspect of insurance should be carefully considered: insurance as investment. We see this in some forms of life insurance. The insurance company pays out more in aggregate to the people it insures than they pay in! Even so, the insurance company covers its administrative costs and pays its investors a profit. How can this be?

When an insurance company knows it can hold its incoming revenue stream for a long time (because its actuaries told it so), it can invest its balance of money in bonds, stocks, and real estate. So from an individual insured's perspective, the insurance company resembles a sort of mutual fund. Your family gets paid when you die if you have life insurance, or you get payments from a set starting point until the time of your death if you purchase an annuity policy.

In theory Social Security works like this, as do most old-fashioned (defined benefit) pensions. You pay your social security taxes during your work life. The government invests this money in interest-bearing government bonds. The average person gets more than they pay in. Those who die early are out of luck. Those who live long get far more money than they put in. Of course in reality money put in today goes out today to those who are already drawing Social Security. But it shows the idea of insurance that not only spreads risk, but creates additional income for the entire pool of insured people.

Not that anyone in Congress is going to listen to you unless you gave at least $2000 to their election campaign, but given all this, what kind of federal health insurance would you like?

Should it provide roughly equal benefits for everyone? Should it funnel almost all the money to care for those with the most expensive medical conditions? Should the money that goes in the first year be paid out it once, or should it be accumulated, with interest, for the benefit of those who are doing the paying? Should it be subsidized by taxes, or should it generate a profit to the government that pays for non-medical budget items like the military budget?