Monday, 5 October 2009

Difference between transparent lottery and opaque fraud

I thought that your readers might be interested to know that yesterday I was at the chic Parisian race course, Longchamp, where the world's most prestigious (flat) horse race has been run since 1920. Total prize money for this single event was 4 millions Euros this year. Yesterday's dominant winner by two lengths (which incidently I backed) was the Irish-trained, 3-year old colt , 'Sea The Stars'. Unfortunately, it was a very short-priced favourite, so I didn't make much of a profit. However, the winner is considered to be one of the greatest horses of modern times; having won 5 top class races out of 5 previous starts this season including two classics, the English Derby and the English Two Thousand Guineas. No other colt has achieved this remarkable feat, and his projected stud-value has rocketed above 150 million Euros.
Now, I suppose you are wondering: What's all this got to do with 'MLM' scams? The short answer is: the mathematics of gambling, and the difference between a transparent lottery and an opaque fraud.
Fixed-odds bookmakers are prohibited in France. Betting on horses is a State monopoly held by an organization called the Parimutuel (known as the Tote in other countries). Although, in theory, anyone can pick up a phone and place a bet with a fixed-odds bookmaker outside France. In the Parimutuel system, all bets on a specific event are placed in a central pool. After taxes and the organization's profit, payout odds are calculated by dividing the central pool between all the winning bets, losing bets get nothing. In other words, the only money being paid out has come from the totality of all the players, but, obviously, when they make their bets, they are fully-aware that not everyone is going to win.
I had a particularly interesting conversation at Longchamp with a leading authority on the Parimutuel system who explained to me how her own field of mathematical expertise gave her a remarkable insight into the crazy, Bernie Madoff affair. In effect, Madoff steadfastly pretended (for 20 years) that he only ever made winning bets (on the stock-market) and that he could take any loser's money and make him/her into a winner as well. Consequently, she was fascinated to learn about how the 'Amway' mob have been getting away with perpetrating essentially the same ridiculous swindle for 50 years.
When I have more time, this analysis should make an excellent subject for an extended article.
David Brear

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