Prof. Gramm teaches popular college course in horse betting

Las Vegas

The Kentucky Derby is that rare time when everything looks just fine for racing. It remains one of the biggest social events of the season, one that belies the rest of the year when the game struggles to attract young, new players.

Now turn back the clock about four months and maybe 60 years. Head about 400 miles southwest of Churchill Downs to Memphis, Tenn., where a few dozen college students have been immersed this semester in a popular economics course which had not been offered for four years. The syllabus is framed not by textbook theories and wonky financial prisms but by horse racing. Their guru is a professor who also owns horses and successfully bets on them.

Flatter Pod: Hear the full Marshall Gramm interview.

“I try to teach economics, a little finance, there’s some psychology and decision science involved,” Marshall Gramm said. “We talk about horse racing. We handicap races. They learn how to read (Daily) Racing Form. But it’s really about betting the horses and looking at betting markets.”

Ah, the purity of the game that so many of us came to know and love. Never mind the distractions of a market diluted by new forms of gambling and a sport that peaked when grandpa and grandma were young.

“I don’t talk about the industry,” said Gramm, 52, who chairs the economics department at Rhodes College. “It’s really about the wagering.”

The course is called economics of racetrack wagering markets. Gramm is offering it for the fourth time. The 39 students who are taking it now were required to have passed one economics class beforehand.

“I let it get to 75 the last time I taught it, which is too big,” Gramm said. “I tightened the requirements, and I got a good class, and I’m excited about it.”

Rhodes was on its spring break last month when Gramm was interviewed about the course for Horse Racing Nation’s Ron Flatter Racing Pod. He just had competed at Horseshoe Las Vegas in his 12th National Horseplayers Championship. His two entries finished 209th and 302nd in a field of 828. His best outcome was in 2019, when he finished ninth just three months after he was fifth in the Breeders’ Cup Betting Challenge.

“We get back from spring break, and we’ll have an exam coming up,” Gramm said last month. He could be saying the same thing now with classwork ending next week and finals starting May 4, two days after the Kentucky Derby.

“It is a class with exams, and it’s been a lot of fun,” Gramm said. “They learn how to make Beyer Speed Figures. We do a lot of modeling. We build a pace model. We build a model of track bias, and then we talk a lot about looking at the odds and how the odds predict outcomes, incorporating different variables into the models and how those change the explanatory power of models. We’ve really moved much more from when I originally taught the course to thinking about this in terms of a modeling problem.”

If there is one thing the students are hearing more about now than they did in 2022, it is computer-assisted wagering. Gramm does not sugarcoat the reality of their rising dominance in pari-mutuel pools.

“We talk a lot about the late money movements and the impact of late money movements and what those late money movements imply about a horse’s chance of winning,” he said. “We also talk very explicitly about modeling and how to build a model, the explanatory power of the odds and how much the game has really changed.”

Gramm said the betting public has gotten more and more intelligent about how CAW teams will affect the final odds, even if that stokes frustration. He even quantified it.

“If you go back maybe 30 years ago, the odds themselves explained about 12% of the variation in outcome,” he said. “Now it’s twice that, 24%. So the public is a lot smarter. Now the public incorporates casual players, incorporates professional players, weekend warriors, computer players now. All those come together and make the market price, and the market price is very efficient.”

Then Gramm got blunt about how the typical racing handle is gathered.

“A lot of the dumb money has left the pools, and it’s been replaced by computers that are changing the numbers, making the market even more efficient,” he said.

Gramm zeroed in on horseplayers’ collective criticism of computer players who use their advantage to make thousands of bets per second to dull the odds on any given race. Especially it is the 9-1 horse five minutes before post time who is cut to 4-1 at post time and ends up at 5-2 in the last click after the gate opens.

“In 2017 a student may come out of my course thinking I want to play the horses more,” he said. “Now what I hope they get out of this course is they should think about it. If I bet sports or if I bet the horses, I should know what I’m up against. What am I up against? I’m up against modelers. I’m up against professionals. This is really what they put into the game, so when I’m betting a sporting event, I know what I’m up against. If I’m doing it for fun, that’s fine, but to think I could just roll out and do this professionally, it’s a lot trickier.”

Artificial intelligence is another factor that has grown exponentially since Gramm last taught his class. He has taught his students how to use it in building models for the races they are playing. That lesson comes with a warning.

“The cost to learn the program is much, much, much lower,” he said. “Now it’s really about getting good data, getting proprietary data. If you just take Equibase or DRF data and gum it up and run it through any sort of machine learning or some sort of model, you’re not going to have enough of an edge to where you can ever turn a profit.”

Gramm is the son of Phil Gramm, the former U.S. senator who himself was an economics professor in the ’60s and ’70s at Texas A&M. While it may be said that money matters are in his blood, he rolled up his sleeves to get fully involved in racing. Not just bettors, Gramm and Arkansas financier Clay Sanders started their Ten Strikes Racing partnership in 2016. Four years ago Warrior’s Charge became their first millionaire. Gramm also is an investor in Horse Racing Nation.

As much as racing is intertwined into his life, Gramm knows other forms of gambling may look more attractive to new players who do not have the patience to learn about the nuances of pari-mutuel pools.

“Recreational players seeing the prices dance around is a huge challenge,” he said. “I go play poker, the house cuts 4%, I play the races with blended takeouts of 20%, I’ve got no shot. You take someone to the races, they likely have a losing day, the prices bounce around, it’s hard for them to come back.”

Gramm said racing also has missed an opportunity to get in on the ground floor of prediction markets that actually had their roots with Betfair’s horse-race exchange wagering dating to 2000.

“We made a real mistake,” he said. “If we had an exchange wager for the win pool, the modeling teams would help make markets. People would get fixed odds. We’d be able to trade Derby futures now. Is it a threat to the industry? I guess, sure, but in some ways, the prediction markets are handling so much money in other things. Horse racing has such a small market, such a small involvement, I’m not sure it’s important enough for them to worry about. Maybe Churchill will sue because of money bet on the Derby, but I worry that they’ll ignore us, because they don’t think we’re important.”

As discouraging as all this looks, Gramm said it should be a clarion call for racing’s guardian leaders to cut takeout, put limits on CAW players and be better late than never into prediction markets. If not, he fears a repeat of what happened with another U.S. pari-mutuel sport.

“We can go the way of dog racing,” he said, “if we don’t continue to cater to horseplayers.”

It might have been just a small step against that tide, but Gramm took his students to Oaklawn last month for the Grade 1 Arkansas Derby. He offered a contest winner in his classroom a 0.5% profit share in a Ten Strikes 2-year-old. He also hopes one day to make video recordings of his lectures available to the public.

“What’s funny is the first time I taught the course was 2017,” Gramm said. “I was very careful not to talk about gambling, because it was before sports betting was legalized, and I didn’t want to I didn’t want to have any concerns about the class. ... Now I can really use the class time to do fun stuff.”

Hotel accommodations for Horse Racing Nation coverage of the National Horseplayers Championship were provided and paid for by the National Thoroughbred Racing Association.