How This Man Profited $1 Billion Betting on Hong Kong Horse Races

this is bill benta a reserved unassuming and media shy Pittsburgh resident who made almost 1 billion dollars by gambling on horse races the man was a mathematical genius who was on the cutting edge of both computer science and statistical modeling so it is widely assumed that with his business knowledge that he could have made money just about anywhere in a rare interview when asked about his success in horse-racing he said I was driven only partly by money I believed I probably could have made more money in finance but that didn't interest me I didn't get in professional horse racing because it was hard but because it was said to be impossible bender grew up in a Pittsburgh suburb called Pleasant Hills he was a diligent student and after graduating from high school he went on to study physics in college his parents had always given him a lot of freedom on his vacations he had hitchhiked through Europe and into Egypt and driven through Russia in 1979 at the age of 22 though he put that freedom to the test he left school boarded a Greyhound bus and went to play cards in Las Vegas benta had been engrossed in a book called beat the dealer written by a math professor Edward Thorpe that describes how to overcome the house advantage in blackjack Thorpe is today credited with inventing a system known as card counting keeping track of the number of high cards dealt and then betting big when it is likely that high cards about to fall it takes concentration and lots and lots of hands to turn a tiny advantage into profit but it works bender worked at a 7-eleven for $3 an hour and took his wages to budget casinos to employ these methods on a good day Bentham might win only about $40 but he had found his calling this all started to turn around though in 1980 he just applied for a job as a night cleaner at McDonald's when his friends introduced him to a man who had changed his life Allen woods was the leader of a card counting team that had recently arrived in Las Vegas Woods was then in his mid days with a swoop of gray hair and cold blue eyes once an insurance actuary with the wife and two kids he one day decided that family life just wasn't for him and began traveling the world as a professional gambler Woods impressed benta with these tales of fearlessness recounting how he'd snuck past airport security in Manila with $10,000 stuffed into his underwear most appealing of all he pursued the card counters craft with discipline his team pulled its cash and divided winnings equitably having more players reduced the risk of a run of bad luck wiping out one's bankroll and the camaraderie offset the solitary nature of the work this is all very similar to the techniques displayed in the movie 21 benter was impressed and joined the squad almost instantly within six weeks he found himself playing blackjack in Monte Carlo served by waiters in dinner jackets he felt like James Bond and his earnings grew to a rate of about $80,000 a year with this success then to soon abandon any idea of returning to college this lifestyle all came crashing down though in 1984 when benta woods and some of their partners earned a place in the Gryphon book a blacklist that a detective agency circulated to casinos filled with known troublemakers and card counters this list made it almost impossible for them to keep playing in Vegas they needed to find another gang Woods knew that there were giant pools to attack in Asia and that the biggest of all was run by the Hong Kong jockey club founded in 1884 as a refuge for upper-class Brits who wanted the feeling of England in their little colony the club changed over time into a state gambling monopoly it's two courses Happy Valley and Sha Tin were packed twice a week during racing season that extended from September to July Hong Kong's population was only about 5.5 million at the time but it bet more on horses than the entire US population reaching about 10 billion dollars annually by the 1990s Hong Kong's racing used a paramutual also known as a totalizer or an exchange system unlike odds at a regular bookmaker which are set in advance and give a decisive edge to the house paramutual odds are updated fluidly and in proportion to market betters wages winners split the pool and the house skims a commission of about 17% in this case the house was the Hong Kong government and the scheme provided as much as 1/10 of Hong Kong's total tax revenue this is remarkably similar to a stock exchange the exchange itself just facilitates the exchange of money and securities but does not get involved in their price at all and makes a profit only by charging fees on the exchange but all of this was to say to make money benta would have to do more than just pick winners he needed to make bets with a profit margin greater than the club's 17% cut this was a surprisingly tall order considering that most gamblers are expected to lose about 20% of everything that they gamble horses benta needed guidance on how such a system might work he went to the gamblers book club at Vegas and bought everything he could find on horses there were lots of systems publishing incredible results but to him they seemed a bit flimsy most have been written by journalists or amateur handicappers few contained real math dente' wanted something more rigorous so he went to the library of the University of Nevada at Las Vegas which kept a special collection on gaming buried in stacks of periodicals and manuscripts he found what he was searching for an academic paper titled searching for positive returns at the track a multinomial logit model for handicapping horse races as thrilling as that sounds this is all what it meant a horse's success or failure was a result of factors that could be quantified statistically take some variables like straight-line speed size winning record skill of the jockey the weather on the day the condition of the track etc weigh them in terms of how much they are likely to impact the outcome and presto outcome a prediction of the horses chances of winning more variables better variables and final weightings improve the predictions the authors of the book actually weren't sure if it was possible to make money using the strategy and be mostly interested in statistical models they didn't try that hard to find out there appears to be room for some optimism they concluded benter taught himself advanced statistics and learnt to write software on early pcs with green and black screens meanwhile in the fall of 1984 Woods flew to Hong Kong and set back a stack of yearbooks containing results of thousands of horse races benta hired two women 30 and the results to a database so he could have more time to spend studying regressions and developing the code it took nine months but in September of 1985 he flew to Hong Kong with three bulky IBM computers in his check luggage ready to take on Hong Kong benta and woods rented a microscopic apartment in a dilapidated high-rise their office was an old wooden desk and a table piled high with racing newspapers twice a week on race day benta would sit at the computer and woods would study the Racing Form early on the bedding program that bent had written spat out bizarre predictions and woods with his year-long head start studying the Hong Kong tracks would correct them where he saw fit they used a telephone account at the jockey club to call in their debts and watch the races on TV when they won they were satisfied smiles only at the end of the day they weren't gambling so hooting and cheering was not in order between races then two struggled to make his algorithm stay ahead of a statistical phenomenon known as gamblers ruin to explain gamblers ruin imagine a game of heads or tails where you are making $1 bets on the outcome now let's say you have $10 to play with and your opponent has an unlimited amount of money you might think that neither player is likely to walk away with any more than they started with and mathematically this is true but it does not take into account swings or streaks of one outcome or the other even though a game of heads or tails is completely fair with no advantage to either player the play with $10 is guaranteed to lose to the play with unlimited money given enough flips of the coin because it only takes ten losing guesses for the $10 player to be out with enough flips of a coin a losing run like this is almost inevitable but for the play with unlimited money this is no problem at all in Bender's case he was the player with $10 and the gambling population of Hong Kong was the player with unlimited money only in this case he was fighting up against a 17 percent disadvantage making him work twice as hard just to break even one approach familiar to bento from his blackjack days was to adapt the work of a gun slinging Texas physician named John Kelly Jr who had studied the problem in the late 1950s Kelley imagined a scenario in which a horse-racing gambler has an edge or a private wire of fairly reliable tips how should he bet wager too little and the advantage is squandered but if he bets too much financial ruin beckons remember the tips are good but not perfect Kelley solution was to wager an amount in line with the gamblers confidence in the tip bender was struck by the similarities between Kelley's hypothetical tip wire and his own prediction generating software they amounted to the same thing at the end of the day a private system of odds that was slightly more accurate than public odds to simplify imagine that the gambling public can see that there was a horse running with an odds of four to one Venters model might show that the horses slightly more likely to win than those odds suggest say a chance of 1 in 3 that means benta can put less at risk and get the same return a seemingly small edge like this can turn into a big profit and the impact of all of that bad luck can be diminished by betting thousands and thousands of times till his equations applied to the scale of betting made possible by computer modeling seem to guarantee success this was what benter desperately needed a system to say ahead of this gamblers ruin outcome so did this all work well no by the end of bent his first season in Hong Kong in the summer of 1986 he and Woods had lost one hundred and twenty thousand dollars of their original one hundred and fifty thousand dollar stake bender flew back to Las Vegas to beg for more investment unsuccessfully and Woods went to South Korea to gamble they met back in Hong Kong in September Woods had more money than benta and was willing to recapitalize their partnership if it was renegotiated I want a larger share Wood said invent his recollection how much larger then trust 90% would said that was unacceptable vendor said woods was used to being the senior partner and gambling teams and getting his way he never lost his temper but his mind once set was like granite bender was also unwilling to budge their alliance was more or less over in a fit of rage been to run a line of code into the software that would stop it from functioning after a given date this was a digital time bomb even though he knew it would be trivial for woods to fix and find later Woods would keep betting algorithmically on horses benta was sure of that he resolved that he would to benders Las Vegas friends wouldn't stake him at horse-racing but they would stake him at blackjack he took their money to Atlantic City and spent two years managing a team of card counters brooding and working on his racing model in his spare time in September of 1988 having amassed a few hundred thousand dollars he returned to Hong Kong sure enough Woods was still there the Australian had hired programmers and mathematician to develop Venters code and was making money he had moved into a penthouse flat with a spectacular view of the harbour benta still refused to speak to him venters model required his undivided attention it modded only about 20 inputs just a fraction of the infinite factors that can influence a horse's performance from wind speed to water date for breakfast in the pursuit of mathematical perfection he became convinced that horses raised differently according to temperature and when he learned that British meteorologists kept an archive of Hong Kong's weather data in southwest England he travelled there by plane and rail almost instantly a bemused archivers led him to a dusty library basement where Ben - copied years and years of figures into his notepad when he got back to Hong Kong he entered the data into his computers and found that it had no effect whatsoever on race outcomes such was the scientific process I suppose other additions such as the number of rest days since the horses last race were more successful and in these first year after returning to Hong Kong been to one $600,000 one of the most surprising statistical additions came from a man benter employed called Bob more and manic New Zealander whose passions were said to be cocaine and video analysis he would watch footage of past races to identify horses that should have won but were bumped or blocked and prevented them from doing so it worked as a kind of bad luck adjuster and made the algorithms all that little bit more effective the next say Seng season at the end of summer of 1990 benta had actually lost a little bit this year but was still up overall he had hired a team of employees ranging from consultants to independent gamblers to journalists to coders and mathematicians and just about anyone that could help him improve his model when the volume of bets rose he recruited english-speaking Filipinos from the ranks of the city's housekeepers to relay his bets to the jockeys clubs telephone bet lines reading wages at a rate of about 8 a minute at his point Venters gambling operation was starting to look a lot more like a hedge fund trading for than a gambling house a breakthrough came when been to hit on the idea of incorporating a data set that was hiding in plain sight the jockey club's publicly available betting odds building his own set of odds from scratch had been profitable but he found that using public odds as a starting point and refining them with his proprietary algorithm was dramatically more profitable he considered the move his single most important innovation and in 1992 the 1991 season he said he won about three million dollars the following year the hong kong jockey club phoned banter at his office they'd established in Happy Valley he winced remembering the meaty hands of Las Vegas pit bosses on his shoulder but instead of threatening him a jockey club salesperson said you were one of our best customers what can we do to help you the club wasn't a casino trying to root out gamblers who regularly beat the house it's incentive was just to maximize betting activity so more revenue was available for Hong Kong charities and for the government benter asked if it was possible to place his bets electronically instead of over the phone jockey club agreed and installed a system that vente called the big CIT a customer input terminal he ran a cable from his computer directly into the machine and increased his betting expense in Chile throughout 1997 a shadow loomed over Hong Kong after a hundred and fifty six years of colonial rule the British was set to hand the territory back to China on July 1st there were news reports of Chinese troops massed at the border and many Islanders feared it would be the end of Hong Kong's freewheeling capitalism trying to try to rear Shore residents that for the most part they would go unimpeded horse-racing will continue and the dancing parties will go odd said Deng Xiaoping the former communist party leader at the time bento faced an additional and more peculiar anxiety a month before the handover his team won a huge triple trio jackpot they were in the middle of an epic winning season up more than 50 million dollars the jockey club normally put triple trio winners in front of the TV cameras to show how for example a night watchman had changed his life with a single bet very similar to the lotteries in the United States this time nobody wanted to tout that the winner was an American algorithm though the club had come to see the syndicate success as a headache there was no law against what they were doing but in a paramutual gambling system every dollar that they won was a dollar lost by someone else if everyday punters at Happy Valley and scharton ever found out that foreign computer nerds were siphoning millions of dollars from their pools they might stop playing entirely benta had his big CIT privileges revoked and on June 14th something even worse happened as one of his phone operators called the telly bet line and was told your account has been suspended Woods was also blocked chloë officials issued a statement saying that they had acted to protect the interests of the general betting public benta flew back to Vegas as he did every summer to think about his next move he reread the club's statement phone betting was out but nowhere did it say that he was banned from betting altogether he got an idea as in his blackjack days it would require a low profile one Friday evening that autumn after the handover the territory to China been to paid for a hotel in Hong Kong's Bayside Northpoint district he made sure to get space on the ground floor for easy access he had helpers haul in laptops a 50 pound printer and stacks and stacks of blank betting slips on Sunday morning race day they checked the internet connection and put a Do Not Disturb sign on the door at 1:45 p.m. 15 minutes before the first race the laptops received lines of bets from Venters Happy Valley office the printer began to suck in blank tickets and churn them out with blank marks and the relevant betting boxes eight minutes to starting pistol benta grabbed a pile of 80 odd printed tickets and a club issued credit voucher worth $1,000,000 and bolted for the door across from the hotel was an off-track betting shop it was loud it's very smoky inside but he found an automated betting terminal and got to work he started feeding in tickets after tickets one after the other until the screen flash with a message betting closed then two hurried back to the hotel room to see which wages had hit at 2:15 p.m. the laptops downloaded the next package of his bets and it was time to go again simultaneously other teams hired by bento were doing the same thing in all different parts of Hong Kong bento solution to the phone betting ban at the time was very time-consuming and required him to manage teams of runners who risked being robbed but it was almost as profitable as his old arrangement the new political dynamic in Hong Kong under the rule of China brought about some unwanted attention for bent on Hong Kong's tax authority began to investigate The Syndicate bylaw gambling winnings were exempt from taxation but company profits weren't the question was whether the syndicates had moved beyond conventional betting and started behaving more like corporations the implications would be dire if the Inland Revenue Department decided to tax profits recto actively meaning that they would go after all of the revenue ever generated by benta when tax agent asked woods for a list of his investors he fled to the Philippine been to continue to operate his in-person betting scheme throughout the turn of the millennium with his model expanding to track more than 120 factors per horse but the logistics were providing a grind he felt disconnected from his gambler friends in who were a nocturnal clique of geeks and rogues he had started mixing with her the more professional crowd adapting their dress code of smart suits and ties he had taken a more active role in the local Rotary Club chapter and benter himself embraced the model Service Above Self giving millions of dollars anonymously and visiting improv with schools in China and refugee camps in Pakistan for the first time he thought seriously about quitting and moving back to the US if it was all had to end he thought I've had an incredible run it was then in November of 2001 they decided to have a final pun on the triple trio this was the holy grail of Hong Kong horse-racing a bet that involved listing the first second and third runner in order on three separate races this doesn't sound too challenging but in reality there is over 10 million possible outcomes only one of which would win the prize been turret avoid major prizes like this since 1997 for fear of angering the jockey club's management but this jackpot was just too big to resist wagering on it was something of a lock albeit an expensive one he spent 1.6 million dollars on 51,000 combinations if he won he decided he would leave the tickets unclaimed Club policy in such cases was to direct all of that money to a charitable bust after the third race when Bobo duck mascot Trisha and frat rat romped across the finish line bento sat across the road from the track in a plush office ignoring the live feed of the action that played on the TV screen the only sound was the harm of a dozen computers 35 of their bets had correctly called the finishers in the first two races qualifying for a consolation prize and one wager had correctly predicted all nine horses it wasn't immediately clear how much he'd made so the two Americans attempted some back of the envelope math until the official dividend flashed on the TV eight minutes later bento had won a jackpot of 118 million Hong Kong dollars later that year Benton would retire back to his hometown of Pittsburgh the biggest jackpot in Hong Kong racing history would go unclaimed and eventually be distributed by the jockey club to charities all throughout Hong Kong just has been - had intended I really liked the story of Bill Bennett Ernie's algorithm for horse racing because it is remarkably similar to how most financial markets operate today most people think of Gordon Gekko characters with the inside scoop on company performance being the main actors and stock exchanges around the world and while that was true some time ago today these markets belong to computers that work off big datasets to find opportunities to buy a security for less than it's worth thanks for watching guys I hope you enjoyed the video as always I have left my email in the video description or if you would rather I try my very best to reply to as many comments as I can in the comment section and if you did enjoy the video please considering liking and subscribing it really helps out thanks guys

Channel: Economics Explained

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Keywords: the economy of horse race betting, the economics of horse race betting, the economy of horse race betting explained, the economics of horse race betting explained, horse race betting economics explained, economics explained horse race betting, horse race betting economy explained, horse race betting economy, horse race betting economy economics explained, horse race betting economics, bill benter, how bill benter made a billion dollars, economics explained

Id: efBG1YfuNhg

Length: 23min 44sec (1424 seconds)

Published: Wed Jul 31 2019