The Flawed Logic behind higher takeout

At the July 18, 2014 CHRB Meeting, Tom Ludt, speaking as a representative of track management for Santa Anita, told the Commissioners of the CHRB that 18% takeout on doubles had resulted in a net loss to purses of almost half a million dollars.

Link to the July 18, 2014 CHRB Meeting Transcript:
http://www.chrb.ca.gov/Board/board_meeting_transcripts/transcript_14-07-18.pdf

Quote from page 83 of the transcript:

"MR. LUDT: We do listen, and I do think that's very important. And my challenge and in -- not just me, but the tracks and a TOC, in setting these things, we just -- not -- like we said, it was an experiment. The handle went up, but if you look at the net to the purses, it actually went down almost 500,000 to the net purses on daily-doubles, singling that out."

I think horseplayers everywhere deserve to understand how Ludt, as a representative of track management for Santa Anita, came up with that $500,000 number as the net loss to purses he claims resulted from 18% takeout on doubles.

HANA has obtained a spreadsheet from the CHRB which you can download here.

Believe it or not, the spreadsheet contains the following columns:

1. A column listing handle on doubles.

2. A column listing handle on doubles multiplied by 22.68%.

3. A column listing handle on doubles multiplied by 18.00%.

Incredibly, the $500,000 number given out by Ludt as the supposed net loss to purses because of 18% takeout on doubles was arrived at by subtracting handle on doubles multiplied by 18.00% from handle on doubles multiplied by 22.68%.

Incredibly, the CHRB swallowed the $500,000 number given out by Ludt hook, line, and sinker - because they approved Del Mar's application to go to 20% double takeout for their current meet.

This was the same flawed logic used by Los Al to justify their takeout increase back in 2010.

This was the same flawed logic used by the CHRB, TOC, and Track Management at Santa Anita-Golden Gate to justify SB1072 and the takeout increase that went into effect at Santa Anita, Golden Gate, Hollywood Park, and Del Mar on January 1, 2011.

This is the same flawed logic used by Churchill Downs this past April to justify their takeout increase.

The logic?

We make more money with higher takeout because our latest handle numbers multiplied by new higher takeout rates is bigger than our latest handle numbers multiplied by older lower takeout rates.

But in the real world it never works out that way.

Why not?

The logic is flawed because it fails to account for the fall off in handle caused by higher takeout rates.

Betting handle and takeout rates share an elastic relationship.

The fact is handle is created by bettors who are price sensitive. This is something that has been studied at length and is very well documented in the economic studies paid for by the thoroughbred racing industry.

We found a link to one such study on the website of the National HBPA: here.

We put a link to a second such study on the HANA website: here.

Sadly, this fact has been continually ignored by decision makers within the thoroughbred racing industry.

Fact: Los Al's on track handle was down 27% during the first six months immediately following their takeout increase in 2010.

Fact: Handle at Santa Anita, Golden Gate, Del Mar, and Hollywood Park fell almost $250 million (a quarter of a billion dollars) during the first year of their takeout increase.

Fact: Santa Anita cut one third of its staff as a direct result of the flawed logic used to justify SB1072.

Fact: On page 4 of the 2011 CHRB Annual Report then CHRB Chairman Keith Brackpool cited "the economy" as the reason for California's handle woes.

But SB1072 wasn't the only gambling bill to be passed by the California Legislature in 2010. AB142 authorized the CA Lottery to leverage higher prize payout percentage (lower takeout) to drive an increase in total dollars going to education.

Q. If the economy was so bad, how then did the CA Lottery achieve a completely different result through AB142 and lower takeout than CA Racing did with SB1072 and higher takeout?

Fact: Handle at Churchill Downs was down $49 million vs. the prior year's spring meet in the wake of their takeout increase this past April. Further, Maggi Moss reported on Twitter that Churchill will have a 20% purse cut for their upcoming September meet.

Fact: Handle at the current Del Mar meet is down approximately $30 million vs. the prior year - IN PART - because of player reaction to seeing Santa Anita Track Management use this same flawed logic to blame 18% double takeout as causing a net loss to purses of $500k.

My questions to the CHRB:

Have you not learned anything from all from this?

Can you not see how your continued belief in the flawed logic behind SB1072 is causing you to harm the very industry you are sworn to protect?

Jeff Platt

President, HANA