Gambling, risk, and the utility of money…or ‘A day at the races’

The choppers have been coming in overhead all morning, flying in low under the cloud as they cross Cleeve Common before dropping down onto a field adjacent to the racecourse.  They discharge their passengers then head back towards London and the south-east, where the wealth is concentrated, to fetch more.  It’s not quite ‘Apocalypse Now’ but like the ‘Hueys’ of the Air Cavalry in the film they bring an invasion of a ‘foreign’ culture to the locality – one that revolves around money and horses.  Many of the horses come from Ireland and France, and people come from all over the country and from further afield.  One should not be surprised that those who can afford it travel to the National Hunt Festival by helicopter.  It beats being packed like a sardine onto the crowded trains, or sitting in traffic that crawls through the town, driving in from all directions.  The locals recognise the value of the Festival to the area, and adapt their behaviour for the week: leaving for work early, arranging to stay at home, making sure they are out before the roads get jammed in mid-morning, and back home before the races end late in the afternoon.  Some even leave town for the week, renting out their homes to race-goers, using the money to pay for a holiday; after all, it’s Gold Cup Week in Cheltenham, a chance to make money, and to lose it.

Helicopters arriving at Prestbury Park

An estimated 250,000 people will pile into the town this week[i], more than doubling the population of Cheltenham and pumping around £100 million into the local economy[ii], a figure which is dwarfed by the anticipated £350 million that will be spent on betting.  This year of course, the shadow of Brexit looms over the Festival, with concerns that trade barriers might be erected as a result of the actions of the UK government.  Any potential barriers (which are yet to be decided) could cause significant damage to the Cheltenham Festival and have repercussions across the UK equine sector.  In 2012 British horse racing was estimated to generate £3.45 billion in direct, indirect and induced expenditure[iii], all of which is potentially at risk if increased controls and regulations are applied to the movement of horses and those working in the industry.

To go to the races and see the wads of cash change hands, and eyewatering amounts put down on horses that have an unpredictable chance of winning, whatever the odds, is sobering, and causes one to stop and think, ‘wouldn’t it be of more value to society if that money was put to better use, or invested in some good cause?’.  But of course, the Cheltenham Gold Cup, and similar events, are just a reflection of the role of risk in our culture.  At the races one sees almost a complete representation of society from across the socio-economic spectrum, from the less well-off to the super-rich, and everyone puts money on the horses, to enjoy living in hope and expectation of winning for that short period while the race is run.  You can see some race-goers intently studying the Racing Post, searching for clues that might give a horse and rider the edge that defies the bookies predictions, while others believe that it is so difficult to pick the winners you might as well just choose the name of the horse you like best, or go by the (owner’s) colours worn by the jockey.

Bright coloured silks worn by jockeys can for some be used to select which horse to bet upon

Risk-taking and gambling are part of living, something we cannot escape from, but what really worries us is the lack of control we have over our lives, and it tends to be the isolated incidents, often hyped up by the media that worry us the most.  We overestimate the risk of being involved in a rate event, such as a plane crash, an act of terrorism, or a tower block fire, because we are not in control of those situations.  Although these events might be statistically unlikely they tend to grab our attention, whereas we tend to underestimate the low level but more commonplace risks, such as smoking, drinking too much, not getting enough exercise, or crashing the car.  We also spend inordinate amounts of effort and resources in trying to minimise risk.  The insurance industry is massive, and we are constantly bombarded with offers promising greater security in case of accidents, loss of employment, poor health, theft, or even ill-health of our pets.  Selling and mis-selling of insurance is a constant feature of life.

Having made our lives as safe as possible through insurance we still crave excitement.  Danger and risk from ‘extreme sports’ provide that, but often come with potential for injury, or worse.  Putting a bit of money down on a horse is often the safest expression of a desire to experience some risk, and of course there is the added reward of instant gratification for those that win, a driving force that tends to encourage additional betting.  With controlled gambling, the only person who gets hurt is oneself, and the pain of an empty pocket is usually sufficient to limit the urge to put down more in order to recoup losses (but not forgetting that for some it can also be an addiction bringing ruin to individuals and whole families).  Those with more wealth feel less pain from losing as the marginal utility of ‘spare cash’, in other words the value of having an extra pound in your pocket, decreases with each additional unit of money[iv].  This helps explain some of the large bets placed on horses at Cheltenham.  This human characteristic in relation to money also carries over into our economic system.

The economic system is based on expectations of growth from investing in activities that have different levels of risk attached to the rate of return.  Investing in ‘safe’ products such as government bonds, is a low risk activity that brings low levels of return.  Those with relatively small amounts of wealth are going to be more risk averse and seek ‘safer’ forms of investment; the pain of losing an investment is greater because the marginal utility of the money that was invested is higher.  Investing in something like a new restaurant, or development of a high-tech start-up company brings much greater risk, but also potentially higher rates of return, but only if it is successful.  Those with higher levels of wealth are likely to take bigger risks.  The stock market enables individuals to invest in economic growth, but has also been likened to a form of gambling, predicting which stocks will go up, which ones down, hedging your bets, and putting together ‘investment portfolios’ that promise higher or lower levels of return based on the ‘level of risk’ to which the investment is exposed.  Investing in the stock market, however, is similar to gambling in that individuals are influenced by trends and the actions of others, leading to people piling money onto the ‘favourite’, creating speculative bubbles, and driving down the prospect of making a return.  George Soros who made his fortune from betting against the market provides a revealing insight on the nature of operating in financial markets:

“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”[v] 

Whole areas of the financial services ‘industry’ are built on taking risks, on working out which investments will ‘win’, and which will ‘lose’ money.  Some call this ‘investing’, others think of it as gambling.  To a certain extent it depends on whether you think you know what you are doing in making a calculated risk, or whether you are taking an uneducated guess at what might happen[vi].  People get jobs and promotion based on their ‘ability’ to make more money than they lose.  This is despite the fact that those making investments are not immune to biases such as the increased attention paid to rare events, ‘vivid probabilities’ and human predeliction making us risk averse in relation to potential gains and risk seeking in the realm of potential losses[vii].  There is no doubt a good knowledge of the relevant market is required, but the more money you have at your disposal the more you can spread your bets and afford to take bigger risks, thus increasing the potential to achieve a ‘big win’ at some point.

It is interesting that there is seldom any reference to the role of ‘luck’ in financial investment activities, or betting on the horses.  Luck is not based on any skill, but just the pure good fortune of doing the right thing at the right time.  Greater recognition of ‘luck’ or ‘chance’ in the operation of the economic system might reduce the feeling that we control our destiny, and lower the prestige of those investing our money, but it might also make us feel safer in the sense of having a better understanding of the true nature of the odds facing us, enabling us to take risks with more confidence, and providing clearer signals for when to hold back.  Otherwise it is just like gambling, and why waste time reading what the tipsters have got to say, or paying attention to the bookies odds, when you have almost as much chance of winning by basing your ‘investment’ on the colour of a jockey’s shirt.  At least then we can fully understand what we are doing – and accept all of the risk.

Looking across Prestbury Park at horses mid-race and thousands of race-goers beyond








[vi] ;

[vii] Kahneman, D. (2011) Thinking Fast and Slow.  Penguin Books.