I read the "Wired" article on the Hong Kong betting teams. Very interesting (special thanks to Mall for pointing it out) and I have a few observations.

First off, I would recommend that you take everything you read in the article with a grain of salt. This early statement in the story should set off red flags for everybody, "...horse racing is built around a pari-mutuel system...Therefore, someone with the right research capabilities can EASILY find the public’s miscalculations and exploit them for financial gain."

I actually like this description of handicapping in a pari-mutuel wagering environment. All but that tiny, little, very suspect word, "EASILY."

These computer teams are on to something but don't get fooled into thinking that the current computer programs are better than a good "human" handicapper. The article indicated that many of these betting teams go bust and the successful ones probably earn about a 25 percent return on their wagers. This is pretty good but top human handicappers do just as well or better.

So where do these computer teams get their edge? They get it through high volume betting thanks to the large mutuel pools in Hong Kong. Their computers can tap into the electronic odds even in the complex exotic pools and identify the various "value" plays. They can also quickly calculate the maximum wager that will still maintain a sufficient ROI (if you bet a lot you drive the price down on your selection). The computer can also instantly make large batch wagers at the last possible instant to ensure that the odds don't unexpectedly change before the race is run. (It was not clear if any of the Hong Kong groups have this ability but we know that the South Dakota group was doing this before they got shut down.)

Another advantage of the computer approach (when backed by very large financial resources) is that the selection/wagering process is entirely objective and systematic. If the program is good enough to get a 25 percent return, you can be reasonably assured that you will eventually grind out that return. On the other hand, it is very hard for a person to systematically and consistently apply even the most successful human-based process and one's judgment can quickly get clouded in the midst of losing streak or a string of bad luck or narrow defeats.

These computer betting teams certainly raise several interesting issues. Here are two that come to mind immediately.

Longer term, what happens when these handicapping programs do start getting really good? They probably will eventually. The technology and science is changing rapidly and computer models such as these are going to keep getting smarter and smarter? Will such programs eventually "squeeze" all the value out of the system and turn what is now a challenging competition into a simple game of chance in which the only way you could make money would be via luck since there would no longer be any "value" left on the tote board?

Nearer turn and maybe of even greater concern is the prospect of "computer trading" causing wild odds swings after any human bettor has had the opportunity to make a wager. Imagine that you have identified a horse that you think is a good value play at 5-1 so you put your bet down just before the windows close only to see the odds plummet in the last change thanks to the "computer traders." This could also turn handicapping for the average bettor into a crapshoot since they would only be guessing as to what the actual mutuel payoffs are likely to be.

Sort of scary when you think about it but then nobody ever said this game was easy.

Finally, if you think you can just ignore all this computer stuff and assume that it will all just go away, then you should consider this quote by Sir William Preece, chief engineer of the British Post Office back in 1876.

"The Americans have need of the telephone, but we do not. We have plenty of messenger boys."

Chris