The Efficient Market Hypothesis, Horse Racing, and the Don

Explore the fascinating connection between the Efficient Market Hypothesis (EMH) and parimutuel betting in horse racing. Learn how dynamic adjustments, information efficiency, and the difficulty of achieving abnormal returns apply to both the stock market and the racetrack.

An AI-generated image representing the Kentucky Derby.
The Kentucky Derby.

Horse racing fascinated the Don. Early in his betting career, he would read  The Daily Racing Form with religious fervor studying horse, jockey, and trainer statistics like a mystic might memorize incantations. But no matter how much he prepared, he picked horses little better than some wet rag smoking a cheap cigarette who wandered into the track and picked the favorite.

Sure, the Don had his days. Days when some wild long shoot he'd chosen because of the colt's bloodline or the trainer's secret new technique sprinted across the finish line first at 50-to-1. But on average and over time, the odds on favorites won with the top jockeys aboard and the leading trainers waiting in the winner's circle.

An Efficient Market

Speaking of the winner's circle, at the time of writing in late April 2023, Forte, a Todd Pletcher-trained horse, was the 5-2 favorite to win the Kentucky Derby 2023 on Saturday, May 6.

Veteran jockey Irad Ortiz Jr. gets the mount —meaning he will ride Forte. Through April 28, 2023, Ortiz had 17,509 career mounts, winning one out of every five on average. He has even gotten better with time. In his first 555 mounts of 2023, Ortiz had won 26 percent of the time, or better than one in four times.

Although he had essentially stopped wagering on horses by the time Ortiz started riding professionally in 2000, the Don had long ago recognized that jockeys were one of the most stable and predictable factors in an efficient market and that the Efficient Market Hypothesis (EMH) applied not just to stock, but to horse racing too.

The EMH argues that in a free and public market, investors have equal access to all of the pertinent investment information so that stocks always or nearly always trade at their fair value. Thus, even the most active and intelligent fund managers can consistently outperform the market.

Morningstar's U.S. Active/Passive Barometer report has demonstrated this fact repeatedly. The report is done every other year and looks at more than 60 percent of America's active and passively managed funds. In its 2022 rendition, only 43 percent —less than half— had performed as well or better as passive funds like those tied to an index. This is in spite of the often-held theory that active management does better in a volatile market like the conditions the American stock markets experienced in the wake of the COVID-19 pandemic and the election of President Biden.

Parimutuel Betting

Parimutuel betting on horse races shares several similarities with the EMH and the stock market.

Dynamic Adjustments. In parimutuel betting, the odds for each horse continuously adjust based on the bets placed by bettors. As new information emerges (e.g., track conditions, horses' performance in warm-ups, Etc.), bettors adjust their bets accordingly, and the odds shift to reflect the updated collective opinion. This sort of dynamic adjustment is akin to the EMH, where stock prices rapidly adjust to incorporate new information, making it challenging for investors to exploit any inefficiencies.

No Arbitrage Opportunities. In an efficient market, arbitrage opportunities are quickly eliminated as market participants rapidly correct any pricing mistakes. Similarly, in parimutuel betting, the continuously adjusting odds ensure that any potential mispricing is corrected rapidly. As bettors spot potential opportunities and place their bets, the odds change to reflect the new information, reducing the possibility of arbitrage.

Difficulty in Achieving Abnormal Returns. The EMH suggests that it is difficult for investors to consistently achieve abnormal returns in an efficient market, as stock prices already reflect all known information. Likewise, in parimutuel betting, the odds are determined by the collective bets of all bettors, making it challenging for individuals to consistently beat the odds since the odds already incorporate all available information. This truism becomes clear over many stock trades and many races.

Information Efficiency. Both the EMH and parimutuel betting assume a level of information efficiency. In the EMH, all available information is quickly incorporated into stock prices. In parimutuel betting, bettors use all available information to make their decisions, and the odds adjust based on their collective knowledge. In both cases, the market or betting system is considered efficient in processing and reflecting information.


The Don ultimately stopped worrying about bloodlines, trainers, and race conditions and started betting on jockeys. Top jockeys win about one out of five times, so the Don set up a progressive scheme to generate winnings over time. The Don would say that a jockey should pay him $100 every time he rode.

Thus if a jockey goes off at 5/2 odds, the Don would bet at least $40. If the jockey won, all was well, and $140 was collected. If not, the $40 wagered and the $100 from the first race would be added to the next bet, so the next bet on that same jockey would need to return $240. Make sense?

While it is not progressive betting, index funds are not unlike the Don's betting scheme in that they seek to return profits long-term. They can afford to lose on one stock or two because, in the end, they know the EMH will make them a winner.