Once we started making this series about horses this is the third and final episode in the series people kept telling us that if we really wanted to understand the market for thoroughbred racehorses, which is the glitziest of all the horse markets, that we needed to get to Keeneland.
Keeneland is an auction complex in Lexington, Kentucky.
They hold six major sales a year.
The big one is the two-week September yearling sale.
Unproven horses bursting with promise.
A horse that someone comes to Keeneland to buy with the dream that their yearling will be the next Justify or the next American Pharoah or, God willing, the next secretariat horse.
Hope springs eternal.
The yearling sale is the biggest sale like it in the world and the highest quality.
A huge share of champions over the past few decades.
Maybe 40 of the winners of the biggest US races were bought at Keeneland as yearlings.
So this September, we decided to go see for ourselves.
Keeneland is a massive complex with one racetrack and one training track, a sales pavilion and 46 barns that each have 30 to 40 horse stalls.
You travel around by golf cart.
The grounds are extremely well manicured.
From the first day of the sale to the last, you can smell fresh cut grass.
For this year's September sale, there are about 4,700 yearlings in the catalog.
It also takes a lot of people to make the thing work.
Wade Cunningham, auctioneer, Keeneland.
Rhoda Ferraro, and I'm director of Caneland Library.
We are the only library of our kind in the world and we're by far the largest repository of information related to the thoroughbred breeding and racing industry.
Sean Feld bloodstock agent working the Keeneland September sale looking for yearlings to purchase.
It's like panning for gold.
You just keep sifting and sifting until something sticks.
Robert Clark.
I've been painting out here for the last 20-plus years.
When I'm not painting horses, I will be dead.
I'm Ann Archer Hinkle.
I am the manager of Hinkle Farms in Paris, Kentucky.
We first ran into Ann Archer Hinkle near the barns on the Saturday before the sale started.
It was already very busy with potential buyers assessing the horses.
Grooms and handlers walked the horses and tried to keep them calm.
These horses have a lot of energy.
Now they're being asked to present a more docile version of their competitive selves.
Our team, with microphones and backpacks, just tried to not startle anything that might kick.
Hinkle Farms is run by brothers Tom and Henry Hinkle, and now Tom's daughter Anne.
My great-grandfather bought the main part of the farm in 1926 and it didn't always have horses on it.
He grew bluegrass seed and raised sheep and cattle.
And then in about the 60s he bought his first two mares and now we're primarily a broodmare farm, but we do have like 200 head of cattle as well.
Unlike many of the consignors or sales agents at Keeneland, the Hinkle's only sell horses that they themselves have bred.
These horses have been on our farm since when they were in their mommy's bellies.
So we fold them out on the farm, raise them, and bring them up here as yearlings.
That's kind of our niche in the industry.
And how is Hinkle Farms feeling about their prospects at this year's sale?
You're hoping that all your horses sell for a few hundred thousand dollars, at least.
You're always hoping that you're going to have someone that breaks out that might hit seven figures.
We budget really conservatively because we always hope to be pleasantly surprised, but it doesn't happen every year.
This year, Ann Archer Hinkle has high hopes for a certain dark bay.
Yes, I really love our Not This Time filly out of Stave.
That means Stave is the mother or dam and Not This Time is the father or sire.
She's really, really gorgeous.
And Not This Time is super hot at the moment.
I mean, it's just like every day he has a new great horse out there.
We heard about Not This Time in last week's episode.
He is a stallion that is currently standing for stud at TaylorMade Farm.
They are the biggest consigner at the Keeneland auction.
They have so many barns that it's basically a TaylorMade neighborhood.
When we find Mark Taylor at the presale, he's wearing a black baseball hat with white lettering that reads Not This Time.
Every time there's a horse race that's happening in the week preceding the sale, there's all these horses running and most of them have relatives that are in the sale.
So with us, you know, not this time as our stallion, he's had this incredible run.
The last three weeks have just been incredible.
It's like fantasy land.
I can't even keep up with all the horses that are running well.
Those results, every day they're coming in, you know, a rising tide raises all ships, right?
So it's not just the not this times we're selling, but other consignors have not this times.
That's affecting the value.
When Knot this time started out as a breeding stallion, his stud fee was 15000 per live foal produced.
Now it's $175,000.
That's a one-time fee.
The stallion's owners don't get a share of any future sales or horse racing purses.
But like Mark Taylor said, if your stud's offspring start winning a lot of races, as not this time's offspring have, that drives your stud fee even higher.
When we first spoke with Mark Taylor a couple weeks before the yearling sale, he was feeling bullish.
So how's he feeling now, the day before the auction starts?
Well, it's been busy.
We keep some metrics year to year.
And as of the end of the day yesterday, the number of shows, that's the number of visits by buyers.
That doesn't always translate to a good sale or a bad sale, depending on whether it's up or down.
But the amount of traffic was up about 15% versus last year.
I'd rather it be up than down.
And we hope that the money goes along with that.
Today on Freakonomics Radio, we will watch how the money goes along.
We will talk to some of the people who are buying these racehorses.
Once you get to that point, all you're thinking is drop the hammer, drop the hammer.
We learned about the importance of the horse export business.
American thoroughbreds have been bought and sold all around the world and have formed the foundation of the stud books in many other countries.
We ask where the money comes from to buy all these horses.
You can bet races all day in the US and then at night you can bet races simulcast from Australia and Hong Kong.
And we wonder whether horse racing, the sport of kings, has a future.
Why not expand the casino operations and let horse racing go?
Part three of our series, The Horse Is Us, starts now.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.
Thoroughbreds in particular.
They're kind, they're trusting, they're just magnetic in every which way and they give back more than you get from them.
That is Cormac Branick.
If you want to pull off a sale like Keeneland's yearling sale, you need someone like Branick running the show.
I am the Senior Director of Sales Operations at Keeneland.
We spoke with Brannock a couple of weeks before the September sale.
He grew up in Ireland where he got an undergraduate degree in biotechnology.
Then he came to the States and got a PhD in veterinary science at the University of Kentucky.
He did six years worth of postdoctoral work studying horse immune systems and developing vaccines.
Then he started his own bloodstock consulting firm, and he later worked for two big stud farms.
In other words, Branick's horse knowledge is vast.
Horses are a huge part of the Irish landscape and the Irish culture.
It's something that just about everybody on the street has a connection to.
Either they own a piece of a horse or their neighbor does.
It really is built into the society and it's something that people take a lot of pride in.
When I was growing up, my start was my father taking me to the races.
Some of my first words were racehorse names at the time.
Do you remember any of those early horses?
A horse called Gay Fandango.
I'm not sure when he was born, but it was not far from when I was born.
There have been entire books written about racehorse naming.
Names must obey a set of rules upheld by the Jockey Club, the official breed registry for thoroughbreds.
A name cannot contain more than 18 characters.
It cannot be vulgar or obscene.
It cannot have any, quote, clear and contemporary commercial, artistic or creative significance.
Nor can you repeat a name.
Although, if your horse has a famous dam or sire, you might include their name in yours.
They say that about 35% of a horse's racing ability comes from its genetics.
So 65% of it is environment.
That would be everything from the ride the horse gets, how well the horse is trained.
But at some point, there's that gray area, which is the horse's desire and its own will to win.
And that really is what separates the good from the less good.
If we were to ask 10 buyers who are coming to your yearling auction at Keeneland this year what they think is the most important factor that goes into assessing a horse that they're considering buying.
Do you think we'd get 10 totally different answers?
You'd probably get three or four for sure.
I think the most common answer would be a horse with an athletic look, so a horse with good lines and angles, that's built to be strong enough, sound enough and athletic and fast enough to be successful for what they wanted to do.
Pedigree is obviously another massive component, but you know pedigree doesn't win races.
That's on paper.
And thirdly, the veterinary component.
You know, how clean do the horses vet?
Now, how much of what you just said will be included in the catalog that you and your colleagues put together for the September sale.
So the catalog in its old sense is a print book that is somewhat out of date by the time the sale even happens, because it's printed and distributed around the world weeks ahead.
But the online digital catalogue is something that's becoming a lot more dynamic over the last several years and COVID had a hand in that where there are walking videos, there are photographs of each horse and then there's an updated pedigree version that shows what the other family members have been doing since the horse was entered in the sale back in May.
So you and your team, who are responsible for putting together this catalog and conducting these yearling sales, describe the effort that goes into that.
How big is your crew?
Where do they go?
What kind of information do they gather?
Probably the biggest part that we do as a sales team is the inspection process.
The entry deadline is May 1st every year.
Once we accumulate those entries, we split into two teams of three people a team and travel mostly locally, but also out of state on some occasions, to see, in this year's case, 3200 or more of the yearlings entered in the sale.
We went to about 410 farms.
Wow.
And why we do that is we want to put the best physical versions of best athletes forward in the sale and not just go by what's on paper.
How are prices set?
So sellers will set a reserve if they choose to.
The old adage is you value your horse and you set the reserve at two thirds of that price.
If you think the horse is worth 150, you set a reserve at 99 and let the market play it out from there.
Some people push the envelope, some people don't set any reserve.
The reserves are not disclosed under any circumstances unless the seller chooses to.
When you and your team are going around to these 410 farms though, and you're actually seeing the horses, Is there sometimes a case where the seller will say this is 150000 horse, and then you and your team say no, we think it's a 75000 horse.
That does happen.
So when the sellers or the consignors, their agents, enter the horses, we'll invite them to send in what's known as a wish list, which is the placement that they would like each individual horse to be within the sale.
And the sale of this size has 12 different days and they're paired.
So book one is two days, book two is two days and so on.
And the prices typically, the median price per book goes down by 50%.
What's day one?
About $450,000 in a good year, median price for the yearlings sold.
And it drops to low $200,000 and then to $100,000 to $50,000 and so on.
So it helps the buyers know when they want to show up.
If they have a budget of $30,000, they're going to show up in book five.
They're not going to work for 12 days to buy a horse on day 11.
What share of buyers are American versus global?
About two-thirds are domestic.
Of the remaining one-third, what would you say are the top three spending countries?
Those would be Ireland, Japan, and possibly Saudi Arabia nowadays.
What is your function as the director of sales?
Is it to act as an honest broker so that the market is as legitimate as can be?
Are you... perhaps instead representing the interests of Keeneland itself?
Are you representing the interests of potential buyers?
Well, our interests as Keeneland are the same as the sellers, which is we're partners.
Keeneland will charge a house commission of 5% for sales for horses sold.
And so we want what they want, which is the best, most successful sale across the board.
Structuring the sale.
What our role would be as a sales team would be to just ensure that we think the better horses are forward.
We don't want weaker physicals to be at the front of the sale and create the wrong impression about the crop or the group of horses in general.
Can you just describe what the auction or the days of auction look like?
Is it a live auction, where every single horse is brought into the ring and people are looking at it and bidding?
Or is it more silent auction?
It's a live auction.
All the horses are here on the grounds.
We use 1,600 stalls to move them in and out every day.
It's a hive of activity.
The horses are being shown, sometimes 100 to 120 times per day, seen by prospective buyers, sometimes two or three times.
We have a holding barn in the back behind the actual sales ring that will hold about 12 to 14 yearlings that are the next through the ring.
Talk to me about the upcoming September sale, how it will compare to previous sales in terms of size and
The sale has evolved quite a lot.
The September sale was a secondary sale back about 25 years ago, around the turn of the century.
The July sales, that was the elite sale.
And then September sale just kind of grew in vogue because it gives a little more time for yearlings to mature.
They're that much older and percentage-wise quite significantly more mature.
The largest September sale was in 2007, and we had 5,555 yearlings in the catalog.
But in recent times, especially since the 2008 economic crash, there's been some more selectivity among breeders.
This year's catalog is actually the largest it's been since 2010.
And the quality, I think, from top to bottom is probably the strongest in my memory.
I think excitement is very high.
Global participation is very strong.
American thoroughbreds have been bought and sold all around the world and have form the foundation of the stud books in many other countries.
There are some emerging markets in the Middle East and elsewhere that love to buy American thoroughbreds because they're known for speed.
In a lot of those countries, the racing will happen on dirt, which isn't the case in Europe.
And so American thoroughbreds are dirt speed horses.
So I'm looking at a number, I think this is from last year's yearling sale.
$411 million was the total take.
Is that right?
It was actually $428 million after you include the horses that sold post-sale.
So $411 million through the ring, but then a lot of deals get done the same day.
So, congratulations.
That's a pretty good number.
I hope you get some cut beyond your salary.
We don't.
And honestly, just to what Keeneland is, people think it's a non-profit.
It's actually for profit, but we have a non-profit mission.
Everything Keeneland makes goes back into the industry, whether that's purses or for safety and integrity measures, or for local philanthropic efforts.
And that's a good mission to live by.
With about 4700 horses to choose from this year and with some 400 million at stake, how do buyers assess which horses are worth the investment?
This brings us back to Emily Plant, whom we met last week feeding a carrot to Triple Crown winner American Pharoah.
Plant grew up in Kentucky as a horse crazy kid and a competitive rider.
After college, she was working full time as a banker and was enrolled in an MBA program.
But she didn't love the business world.
And my academic advisor.
He said listen, you have to choose something to study that you will be okay obsessing over for the rest of your life.
His name is Bob Dahlstrom.
I'm so thankful for his great guidance.
I said, listen, Bob, I really like horses.
That's really the only thing I can see myself caring about forever.
Bob was like, if you think you can write a dissertation on horses, go for it.
I was living in Lexington Kentucky, home of the Keeneland sale, and I had never actually been to a thoroughbred auction.
So here I am.
I'm living at the epicenter of Thoroughbred Racing and I just wander into the sale on one of the opening nights of the auction.
This would have been 2006.
Open to the public, yes? open to the public.
Anybody can come in and view what's going on.
I immediately see a horse sell for five million dollars or something.
And me as a lifelong horse person, the horses that I was dealing with are like five, $10,000 horses.
To see a baby racehorse that has never been asked to run, never been asked to carry a rider.
It's only potential at this point to see somebody spend millions on a essentially worthless baby racehorse.
Something flipped in my brain and I was like oh, I think this might be my destiny.
I became instantly obsessed.
Today, Emily Plant is a marketing professor at the University of Montana and she runs a thoroughbred consulting business alongside the racing analyst Bill Oppenheim.
I published the Stallion Spectator rating.
That is a several hundred page research volume with all kinds of detailed statistics about stallion performance and how they rate historically in terms of their quality.
And then we publish the Thoroughbred Market Report, which is a monthly magazine tailored for investors.
In the thoroughbred business, you think about the risk or the return on investment or the predictability, whatever you want to call it, when it comes to trying to buy any unproven horse at auction.
You're supplying all these potential buyers with all kinds of information.
And so people are gathering this data and they're looking at the horses in the flesh.
But when it comes time to measure the correlation between the price that they pay and the success that a given horse will have on the track, how do you think about that?
You're never going to like that answer.
If you try to look at buying a horse as a straight rational return on investment, there's no explanation there.
There is nobody that can claim that it's rational.
But here's the thing.
There is a very small chance that you will hit a huge success.
And if you do hit that huge success, your life can be changed.
If you make the right decision, you can end up with essentially a living, unlimited ATM machine.
The other part of it is people like to go to the racetrack and see their colors on their jockey.
They like to watch their horse run.
It's a social thing.
So there's also plenty of non-pecuniary benefits in terms of the ownership.
Describe what hitting it big means.
Walk us through the racing, the winning races, the stud fees, et cetera, and how the ATM thing happens.
There's kind of two segments to what we call the thoroughbred horse racing industry.
There's the racing side, and then there's the breeding side.
Obviously they're completely tied together and horses kind of move through these segments as they age.
Now, obviously, people stay involved at multiple levels of the game.
Let's say I'm in the racing part of the ownership group and I want to quote unquote keep a leg or retain some ownership.
So I might stay in.
But the money for a top racehorse at the end of their career, for the colts that are going on to stud deals huge money.
How much?
Huge, huge.
You hear stallion deals, you know, 100 million dollars for a top prospect.
You value them at what they'll be able to make at stud, basically in the first four years that they're a stallion.
The other thing is that once a young colt wins like one high profile race.
The competition to buy him as a stallion prospect is already starting.
Let's say you enter into a 60 million stud deal for a colt in August because you think he's going to go on and do great things and he turns out to be a complete dud.
He's not even worthy of standing at stud in Kentucky and he ends up going to Louisiana and standing for 2000.
So even though it might be a little more straightforward on the stallion side, it is still really risky.
Emily Plant's research reports are meant to help mitigate that risk.
Her clientele includes some of the biggest breeders in the country, as well as some smaller farms.
One of our longtime clients, a family business called Hinkle Farms.
They are a subscriber, they get the information and then we'll be meeting with them to talk about the data as it relates to their own mares and help them think through their mating decisions for next year.
At the Keeneland September sale.
Emily Plant walks us over to the maze of barns behind the sales pavilion to chat with Ann Archer Hinkle.
They are generous enough to sit down with us once a year and talk us through some of their data, because you need someone to help you make sense of it.
Finding the right fit for each mare is a little bit of a puzzle.
Remember, at this year's sale, the horse that Hinkle is excited about is a filly that was sired by Not This Time.
Yes, I really love our Not This Time filly.
So, like, what stud fee would you have bred to Not This Time?
Do you remember what you paid for him?
I think it was $150.
Pretty high, but, you know, Not This Time, a tailor-made stallion, we've talked about him before.
Started for a very modest price, $15,000.
Maybe he wasn't $150,000.
I'm really bad about remembering what price you bred him to, because it's like we bred this mare three years ago.
She's sort of our star.
That star filly doesn't have a name yet.
It is usually the buyers who give the horse a name and then register the name with the jockey club before they run their first race.
So this filly for now is called Hip 144.
All the names here start with hip simply because that's the easiest place to put a big sticker with the horse's auction number.
Here again is Cormac Branick describing how the actual sale will happen.
The horses come through, they go into a ring.
There's seating for about 500 people in a fan-shaped pavilion, but people can bid from the back, where the chutes are, with two bid spotters.
A horse is typically only in the ring for 60 seconds, might be 40, it might be three minutes.
And here on the first day of the September sale was the auctioneer's pitch for HIP 144.
Hip number 144 property of Hinkle Farms, Dark Bay or Brown Philly, by Not This Time out of Stave by GoSapper.
By Not This Time the number one sire of two-year-olds in North America in earnings, wins winners and black-type horses.
This filly comes from quite a Hinkle-bred family.
The filly's mother, a stakes performer at Fairgrounds.
The filly's half-brother Spirits Mischief, that's son of Intim Mischief.
A winner at both Keeneland and Saratoga.
And under the stakes-winning second dam you'll find Westwood who, as a maiden, was third in the Grade 1 Santa Anita Derby.
He's broke his maiden sense of the catalog.
One down at Del Mar recently.
Earnings now over $134,000.
Hit $200 million, $300 million, $300 million, $300 million, $400 million, $400 million.
Hit $700 million, $700 million, $800 million, $900 million, $800 million, $900 million.
Hit $1 million, $1 million, $1 million, $1 million.
Roger, $2 million.
Thank you.
Hip number 145, consigned by Claiborne Farm.
And that was the sound of HIP 144 selling for $2 million.
Coming up after the break, we celebrate with the Hinkles and we track down the buyer.
I'm Stephen Dubner.
This is Freakonomics Radio.
We'll be right back.
Everybody got one?
Ah, not bad, not bad.
All right.
Cheers.
Cheers.
Cheers.
Yeah, cheers.
And tequila.
Cheers, guys.
Cheers.
After the hammer drops on HIP 144, the Hinkle Farms family is celebrating outside their barn.
Champagne for everyone, grooms and handlers included.
Our producer, Augusta Chapman, catches up with Ann Archer Hinkle and asks how it feels to have just sold one of the highest priced horses at this year's September sale.
I feel like $2 million right now.
It was beyond our expectations.
Over the past few days we definitely thought, based on the activity and the repeat interest in her, that there was a chance she could bring seven figures.
And then, as we walked her up to and through the sales pavilion, just seeing all of those buyers in the back when they actually are physically following your horse through the ring, it's a really good indication that they're still interested and they're going to bid on her.
So all the big players who had been interested and looked at her several times out here at the barn were up there watching her go through.
And so that's when we really started to feel good.
Earlier in the sale, a colt by the same sire sold for $1,000.
1.6 million.
So I thought there was a chance that she could bring like a million and a half.
What were you thinking as you were seeing it bid over 1.5?
Well, I mean, it was going really fast, you know, and it jumped up.
It got high really fast.
So I thought, okay, there's probably a chance she could hit two at this point.
What does $2 million mean for Hinkle Farms?
$2 million is incredibly significant.
I mean without disclosing too much about the financials of the farm.
It requires a tremendous amount of capital to maintain a farm.
Stud fees alone are...
Over a million dollars every year.
Labor's a huge expense.
Veterinary expenses are enormous.
And just the required maintenance of keeping up a farm.
Hopefully this is a sign that we'll be profitable this year.
So that was the seller of HIP 144.
Who was the buyer?
Scott Heider.
Hey, this is Augusta from Freakonomics.
Hey, Augusta, how are you?
Scott Heider runs an investment firm in Omaha, Nebraska.
He has also been investing in thoroughbreds for about 30 years.
He tends to buy only female horses.
As racehorses, they tend to be slower than males, but he likes their residual value as broodmares.
So how does Heider decide which horse to buy?
I would say to you similar to the investing world, the third-bread business is truly the intersection of intellect and instinct.
You've got to be clearly smart enough, but it can't just be purely intellectual.
Instinct is a beautiful thing, and usually that only comes to somebody through trial and error.
And learning from mistakes, usually you learn much more from mistakes than successes.
When you're at the Keeneland sales, when you have thousands of buyers looking at the same horses, people are drawing different conclusions.
Sometimes it's the physical attributes.
Sometimes it's the bloodlines.
Other people actually are going into biomechanics.
The horse that Heider settled on at Keeneland.
The only horse he bought this year was the Hinkle Farms Philly, Hip 144.
Heider sat in the ring and handled the live bidding himself.
And what's that feel like?
The bidding was stronger than I thought it would be, for sure.
I had kind of valued her at that million five number, which is plenty.
And the bidding continued.
Ten years ago, I would have maybe paused and not kept pushing a couple bids further.
But I quickly said, well, this is the filly we really want.
If we can make her successful at the track.
This is the filly that will become a future mother with us, a broodmare.
I'll push and I'll go a little higher.
But immediately when that one five got surpassed, I had said in my mind we will not go above two period.
So that was my final bid.
Once you get to that point, when it's the final bid in your head and you know you've just made it, all you're thinking is drop the hammer, drop the hammer, stop.
It's interesting in the auction world because there are some levels that are psychologically like a wall.
A million dollars, when that goes up on the board, it can be a wall and it stops.
Two million is the same thing.
So I thought perhaps that would stop people And it did.
They dropped the hammer.
I had the whole team with me and I looked at everybody and I said well, let's hope this filly's really fast folks, because I just stretched.
2 million is a lot to pay for a one-year-old filly, but Hip 144 wasn't even close to being the most expensive horse at the Keeneland sale.
A colt sired by Gunrunner went for $3.3 million.
All told, more than 3000 yearlings sold for a total of more than 530 million, setting a world record for for a thoroughbred auction.
56 horses sold for more than a million dollars each, another record.
These numbers would seem to suggest a healthy horse racing industry, but it's more complicated than that.
Mark Taylor of TaylorMade Farm told us that record prices do not reflect any kind of racing boom.
In fact, these high prices are the result of shrinking supply.
There are fewer good horses to buy.
Right now, our thoroughbred full crop is smaller than it's been in a long time.
Why is the crop smaller?
Well, there's a lot of reasons to that.
If you look at the big 30,000-foot view, the...
Proliferation of simulcasting and people watching racing on TV and gambling on racing on TV as opposed to being there in person, has naturally reduced the number of racetracks that you need.
So less tracks, you need less horses.
On the other side of that, on the breeding end, if you go back, my grandfather was born in the 1890s.
So he used horses every day.
In fact he had a business where he would haul horses supplies, back and forth between Frankfort, Kentucky and Louisville, and then some to Lexington.
His whole business and his whole life was tied to horses, mules, cattle, animals of all types.
So obviously it was very easy for him to get attracted to racing and be fascinated by that and love horses.
You fast forward to my father, who was born in 1924, right before the Depression.
He grew up on that farm raising horses, working the land, doing those kind of things, went to World War II, came back and then got into the thoroughbred business.
But after he returned, in my dad's class, everybody rode horses to school.
I graduated from high school in 1987.
Maybe 25% of the people in my class of 200 would have some familiarity with horses.
My son, who graduated four years ago from high school I bet there was only 10 that have any familiarity with horses.
So that's a long answer to why the foal crop is shrinking.
I just think that that's faded because of cultural shifts.
One reason that horse racing popularity has fallen off certainly was concern about the animals themselves.
Some people just don't like the idea of an animal being raced for our enjoyment.
Most people I know who are horse people say that's a crazy concern because...
A good racehorse loves running, I gather.
Please correct me if I'm wrong, but I gather that's it.
Yes, you're 100% right.
But then there's also a pretty long history of horses being mistreated or abused or exploited by trainers, I guess primarily
Talk to me about that.
What would you say to someone for whom that's the main objection?
First of all, I understand and I validate what you're saying, because we all love horses and we don't want them to be neglected or abused.
I personally believe horses are born to run, not to use the cliche but we see them when they're born and they come out of their mother and they stand up within 20 minutes and their instinct is to get moving because predators fight or flight.
They want to get going.
Horses 24, 48 hours old are out running with their mother.
You see the babies actually racing against each other, unprompted by humans.
It's their gift, right?
We're not perfect.
We still have strides to make.
But I think the industry has really rallied behind horse care, horse protection.
HISA is the new federal legislation that oversees the safety and medication and testing and those types of things.
It's a very polarizing organization, and I don't think it's perfect yet.
But I do believe that now we can say we're looking at these horses and making sure that they are sound and able to compete safely.
We're limiting crop use in the race.
We're certifying the tracks.
We're making sure that these surfaces are as safe as they can possibly be.
Will we ever have a sport that has zero horse fatalities?
The answer is no, we won't.
But if the horses had a vote and they said we can just stop producing horses or we're going to keep producing horses and you're going to participate in this sport, the horses want to participate.
HISA stands for both the Horse Racing Integrity and Safety Act and the Horse Racing Integrity and Safety Authority, which is a private organization founded just five years ago.
The fact is horse racing is already in serious decline.
The number of races run at U.S. tracks has fallen by more than half since the late 1980s.
I talked about this with Richard Migliore who, after a long and successful career as a jockey, is now a TV analyst for horse racing.
Racing is not as popular as it once was.
There was a period of time when I was in the prime of my career where it was not uncommon to have 20000 people at Aqueduct on a weekday.
And we would race six days a week.
We're down to five days a week during Saratoga, four days a week pretty much the rest of the year.
So there's been a decline in number of racing days.
A lot of racetracks have closed.
I could go through a list of tracks that I rode at that are now defunct.
Name a few.
Well Hollywood Park in California, Suffolk Downs in New England, Garden State and Atlantic City in New Jersey.
I am just touching the surface here.
There's a lot.
Now, obviously, technology, they don't have to be at the races to wager.
The problem with that is there will be a day when the people that are wagering online off site those people are going to die out, lose interest, move on to something else.
And where is the next generation of people that are going to start wagering on racing?
I don't think someone's going to magically wake up in the morning and go.
You know, I think I'm going to start betting on horses today online, if they've never experienced the event.
It may not be a problem for 10 years, 20 years, 30 years, but it will be a problem.
But for now, there are some people who wake up every day ready to bet on horses.
I mean, horse racing, even overall as a sport, is like joining a cult.
And that is?
Marshall Graham.
I'm a professor of economics at Rhodes College in Memphis, Tennessee.
I'm a horse player, horse owner, horse breeder.
Do you also teach about horse trading and or racing at the college?
I do.
I teach the economics of racetrack wagering markets.
I've taught the course three times.
The last time I taught it, in the spring of 2022, I had 75 students, which I think was the biggest course on campus.
Rhodes is a small college with about 2,000 students, and I'll teach it again in the spring of 2026.
Describe the median student who takes the course.
What are they looking for?
What are they hoping to get out of it?
Obviously it's going to jump out in any course catalog as demonstrably different and more interesting than a lot of college courses.
But is it the kind of people who are wanting to get into the horse industry, whether on the racing side or some other side?
Is people who are just curious about horses generally?
Is it people who want to be better gamblers?
Well, first of all, there's a lot of interest in gambling, especially with this Supreme Court decision that legalized sports betting.
In 2017, when I first taught the course, I was very careful to not focus on betting.
I talk a lot about small sample size decision making instead of betting.
And now I feel less concerned about that.
Playing horses is very different.
I think that a lot of the students are familiar with sports betting, but horse racing is different and unique enough, and so it allows them to enter a world that most of them know nothing about.
Initially, when I taught the course, it's mostly guys.
If you look at sports bettors, next weekend is the National Horse Players Championships, and most of them are guys.
Tell me a little bit about the National Horse Players Championship.
Will you be there again this year?
I will be there.
I'll be there for the 11th time.
It's a...
Tournament that this year is going to have 800 participants.
It's in a giant ballroom at the Horseshoe Casino.
In Vegas?
In Vegas.
There's basically every track running.
You can play those races.
It's a mythical contest, meaning you make mythical $2 win place bets.
The win bet is obviously if your horse wins, your bet wins.
The place bet is your horse finishes first or second.
Mythical meaning it's like a poker championship.
You're not playing with real money.
You're playing with chips.
Exactly.
Exactly.
And the payouts are determined by the payouts on the tote board.
So you have to pick horses that win races, but you also have to bring in horses that have decent prices as well.
You can't just pick all favorites and you can't just pick all long shots.
You got to hit a lot of races.
And then the top 10% advanced to the final day.
I think last year, the winner won $800,000.
How hard is it to qualify?
How good do you have to be?
How good are you is what I'm really trying to find out.
Well, I think that if you persist enough, you can qualify.
It is in some ways a total crapshoot because there's 800 people participating.
The whole contest, if you make it all the way through, is like 57 races.
Playing 57 races is not exactly like playing 57 hands of poker and determining who's the best.
It's not a huge sample.
So it's a crapshoot, but it is an opportunity to meet other horse players.
And betting on horses can be a fairly independent experience.
A little lonely, you mean?
Yeah.
I mean, you're doing it often now from your home, right?
Horse players, a lot of them now play online.
I'm in Memphis, Tennessee.
There's no racetrack.
The nearest racetrack to me is three hours away.
So I'm playing at home, watching the races on television.
I will text my friends.
But all these friends I have met through the NHC, it's in a way a horse players convention.
So it brings horse players together and you meet other people with your same obsessive interest.
It's not a sport that a lot of people necessarily know about.
Horse racing has a great history in the US and it was certainly one of the most popular sports in America up to a certain point.
But now, not many people know it exists outside of the Triple Crown.
Tell me some things that you love about it.
There's language, there's excitement, there's the animals themselves, et cetera, et cetera.
But for people who don't know the ecosystem at all, what is it that makes you so enthusiastic, makes you spend so much time on it, spend money on it, link it with your profession?
Well, first of all, I think there's nothing more exciting than a race.
The pageantry, the competitiveness and races themselves are exciting.
As a horse player, I get to spend my whether it's 2 or whatever, I bet I feel like, at least for that a minute and 12 seconds or two minutes or however long it is.
I feel like I own that horse.
The race itself is exciting.
And I remember as a kid watching the Kentucky Derby and realizing the sport existed.
The race itself was so exciting and wanting to learn more.
I was a newspaper kid and there were two pages on horse racing.
It was numbers and charts.
The guy who wrote about horse racing in the Washington Post was a guy named Andy Beyer.
Beyer was the popularizer of speed figures, is a high schooler.
I bought his books.
I was at the age where a lot of boys get into baseball because of all the statistics.
I love baseball, but I realized that horse racing was the same.
You could bet on horses and be an active participant.
I remember when I turned 18, I drove the Pimlico.
I still remember the first horse I made a bet on, a horse named Quail Rid Swap.
How'd you do?
Oh, the horse won.
So take a step back again for a second.
I'm just trying to put together the pieces of the Marshall Graham constellation, because there's professor and there's horse player, and then there's horse buyer and seller as well.
How do you describe the totality of the things you do?
I'm horse player first.
On a typical weekend I'll watch the races and I'll bet the horses.
Maybe I'll play in a handicapping tournament.
That has led to everything else, right?
That has opened up research avenues for me as an academic.
I got my PhD.
I realized at some point I was I'd written my dissertation on banking regulation, which is ultimately really boring.
We have this search engine called EconLit where you can look at all academic articles and realize there was this huge literature that's tangentially related to horse racing.
And so...
With a colleague of mine, we gathered a data set and looked closer at betting markets, and that made my academic career.
It's really all back to betting on horses.
And then, as a result of that, eventually got into the claiming game, got into the partnership game, breed race horses and that's ultimately sprung out from my interest, first as a horse player.
Walk me through those different components from the ROI or financial impact.
I know you're an economics professor and presumably that's just a straight up salary.
There's no parlay.
There's no daily double on your salary, correct?
Straight up regular salary?
Yeah, straight up regular salary.
Okay, then you're a horse player.
Tell me if you're willing.
You know how much you might bet in a given year and what your long-term ROI has been.
So it depends on how you measure things.
I've had good years.
There was a year in 2020 where I won the Breeders' Cup betting championships.
That, along with the National Horse Players Championship, are probably the two biggest events.
In that event, I turned a $7,500 bankroll into...
$170,000 over the course of two days.
Nicely done.
And then got an additional $350,000 in prize money for winning the contest.
So that was a big score.
I've had years that have been very good years as horse player, and I've had others that are struggles.
When you say struggle, you lose money in a given year, yeah?
Yeah, lose money, right?
So there are ups and downs and I've been driven a little bit more by an outlying big score, right?
A big score like that, a half million dollar score is going to make your year.
I assume you pay taxes on the winnings.
Yes, I'm very diligent about taxes.
For people who don't know much about sports betting or only know about the modern version of legal online sports betting, describe why horse playing may give you an advantage in who you're actually betting against and why you think that's an advantage.
Well, when you bet sports, you are betting against the house, right?
There's some elements where the house, the bookmaker, is able to spread their bets across multiple teams and lower their risk.
But ultimately, if you're successful, if you're a winning sports player, the book is going to severely limit you or cut you off.
As a horse player.
The game is parimutuel, meaning that all the house does is collect the money and then they redistribute the winnings to whoever holds the winning tickets.
So everyone makes their bets, the house takes their little cut, called the takeout, And then they distribute the pool to whoever holds winning tickets.
If more people hold winning tickets, then the price is lower.
The favorite has the most winning tickets on it.
And then if there are very few winning tickets, the price is higher.
The whole system was developed by a Paris perfumer named Pierre Olaire as a way to protect bookmakers.
Because this is a system where...
The takeout is fixed, and so bookmakers can't lose.
The house can't lose.
All the house is concerned with is that there are people betting their product.
So they want to do more to encourage people betting their product.
The house doesn't care if you win or lose.
And so in that environment you're really facing other horse players, other casual players, people who just might be betting the jockey or the color of the horse.
You're betting other professionals.
Now more than ever, you're betting other computer teams.
Horse racing has always been legal.
There was a sort of national religious movement that led to prohibition.
That also led to eliminating a lot of racetracks in the early 1900s.
Then, with the Great Depression, horse racing made a comeback as a way to help governments fund themselves.
Racing then arose as really legalized monopolies for gambling.
The only place to go bet outside of Las Vegas was to go to the racetrack.
Racing had its heydays between the 1930s and the 1970s.
If you look at, for example 1968, which I think is maybe the high point of racing, it's right before simulcasting.
In 1968, you had the bet on track.
Aqueduct, which is the racetrack in New York, it's in Queens, it had 139 days of racing.
And its average attendance was 30,000 people.
It outdrew the Mets, the Rangers, the Yankees, and Knicks that year.
So how far has it fallen from the peak?
Well, it's been dramatic.
I think the peak in terms of handle, how much was bet on horse racing was 2002 2003, and that was about 15 billion a year.
Now it's fallen to $11 billion a year.
So it's down 57% inflation adjusted from its 2002 peak.
Coming up after the break, a surprising subsidy that is keeping some racetracks alive.
I'm Stephen Dubner.
This is Freakonomics Radio.
We'll be right back.
Here's something you might want to know about thoroughbred racehorses.
Even though they are getting more and more expensive, they aren't getting any faster.
There are also fewer races for them to run in.
And while there's still a lot of money bet on horse racing 11 billion a year in the US that number has been falling significantly over the past couple decades, as the economist Marshall Graham was telling us before the break.
The problem, Graham says, is that horse racing used to have something close to a monopoly on legal gambling.
The erosion started to occur as more and more gambling became legal.
Initially, there was the New Hampshire lottery in 1964.
New York started off-track betting, which initially helped the racetracks in 1971 but ultimately led to fewer and fewer people going.
Atlantic City came in 1978.
Then you had the proliferation of casino gambling in most states.
The Wire Act in 1961 really clamped down on sports betting, but it was amended in 1978 to exempt interstate parimutuel wagering.
So that allowed for the advent of what's called full card simulcasting, where a racetrack like Churchill Downs could take its race signal and broadcast it to anybody.
So first they would broadcast to other tracks and then to OTBs and now online.
And so by the 1990s, you could have an online account and bet horse racing.
You couldn't bet sports online until... the last five years.
Right.
And now, as we all know, in many places there is legal gambling on just about any sport, and there is a lot less money being bet on horses.
On the other hand, because it's a parimutuel system, you're not betting against the house, you're betting against other horse players.
Right.
And if you're a sophisticated horse player which you are and especially if you're a computer-assisted horse, better then, even though the overall money involved is much less, I would think that the better, more sophisticated players have even more leverage than they used to.
And therefore, it would be an even more profitable business for them than it used to be.
I would say part of that is true.
Because of access and technology, if you have an edge, it's easier to exploit.
Whereas in the past, if I liked a racehorse, I had to drive to the racetrack.
Now it's easy to bet online and you can wake up in the morning and bet races from South Africa and the UK.
You can bet races all day in the US and then at night you can bet races simulcast from Australia and Hong Kong.
The downside of it is the casual player is disappearing from the market.
They're drawn to sports betting.
They're drawn to slot machines.
So it's become shark against shark, and it's become more and more monopolized by computer players.
That's not only for racing.
If you're betting sports, you're certainly going up against people who are involved in computer modeling.
Or the stock market.
The stock market, right.
It's exactly right.
Now, it's a little bit different in racing, though, because the market is pair mutual.
The effect the computer teams have on the wagering market is that they certainly change prices, but they can change prices that you think you're going to get based upon Because of last-click betting, you mean.
Because of last-click betting.
And I think that's the important thing.
When the system was developed...
It was developed when everyone was betting on track.
If you're at the back of the line, you know you're not going to get to the window.
Yeah, you know you're not going to get shut out.
And so it was impractical for someone to try to arbitrage prices.
In its very simplest form, What they're doing is some form of arbitrage.
They're in part using their models.
But not only are they using their models, they're also using public information.
The early computer modelers, a guy named Bill Benter probably the most famous one based upon his Hong Kong modeling realized that the public was the most important piece of information.
The public is very smart.
And collectively, they do a very good job at establishing the price.
The computer models not only use standard handicapping models based upon historical data, they will also input the odds themselves.
And then from that they'll make decisions or build probabilities based upon how they perceive a race as going to go, and then bet those probabilities against the odds to basically arb away price differences.
And that leads to dramatic price shifts at the end of betting.
So you can see horse go from, you know, eight to one to five to two in the last couple of clicks.
That's really what's changed the game, especially in the last five years.
And if I'm a horse player that's behind driving down those odds from the eight to one to five to two.
What am I doing?
Like 15 minutes before the last click?
Am I trying to manipulate the price then to get more money flowing my way once I make those last click bets?
I mean, there would be people who would argue that would be true, that the teams may faint, right?
And that they may inflate the price of horses they'd like to bet and then come back the other way and willingly lose that money, because they can't cancel their bets and then bet more heavily on the ones that they like at the last click, in the last flash.
But there's no hard evidence of that.
Okay, one last question and a big one.
Considering all the ground we've covered, what do you see as the future of the horse racing industry, at least in the US?
I think the future is discouraging.
Racing has had Decades where they have been the legal monopoly.
I don't think they've adjusted well to the competition they've been facing.
And so it's a game that is still priced probably inappropriately.
The takeout that we've talked about is still for a retail player between 18 and 30, whereas for a sports bet it is a lot cheaper.
Changing the prices are difficult for the racetracks.
They have to go through regulatory boards.
And unfortunately, the racetracks in the industry themselves spend as much time lobbying politicians as they do worrying about their fan base.
And what is the horse racing lobby trying to accomplish?
Well, it's a pretty long list.
More race days, a better revenue split, maybe some tax incentives to maintain their historic facilities.
And there's one other big area where the racing lobby has had success.
Getting states to give them a share of the proceeds from all the new online sports betting, all that draft kings and fan duel money.
That's right.
In some states, your NFL and NBA bets are helping to prop up the fading horse racing industry.
And we came across one more potential bright spot for racing.
You know, that's the business model now is the Racino.
That is Thomas Lambert, an economist at the University of Louisville.
And what is a Racino?
You've got track facilities next to a casino or here in Kentucky, not a full-blown casino, but just all the machines.
That is a major source of revenue for those tracks in states which have HHR historical horse racing machines.
And what's a historical horse racing machine?
For all practical purposes, you can call them slot machines or electronic gaming devices, except that they're slightly different.
The results are based upon historical records, data of when plays show, records of horse races going all the way back to 1990.
So, rather than betting on a live horse, you place your bet in a video slot machine that reruns a race from the past, a real race.
But you're not given enough details about the horse or jockey or track to look up the race and cheat.
We have several tracks throughout the state which have racing going on when it's the season, and then the rest of the year you have people using these HHR machines.
That's where the money is right now, and the money from that is used by a lot of these tracks to supplement their purses for when the races are in session.
Historical horse racing machines in Kentucky take in much more money these days than live race betting.
So how does Thomas Lambert think about the future of horse racing?
Over the long term.
I guess the key question is if they are making so much money from the casino side of the operations, then why not expand the casino operations and let horse racing go?
Now, there are exceptions.
You have the premier race tracks, Churchill Downs, Belmont, Pimlico.
And then of course, you have these very important large, well-known races in the Breeders' Cup, etc.
I think those will continue.
They're very popular.
They attract large crowds, even though the general rule is that attendance is falling.
So we'll have the premier races and the premier tracks continuing.
What happens to the lower tier tracks is another question, at least in my mind.
My thanks to Thomas Lambert and to the many other people who helped us learn about the horse industry and horse history and just horses over these past few episodes.
There is a lot to learn.
And I came in knowing very little.
Also, if I'm being honest, with a tiny bit of anti-horse bias, like I said earlier, even though I grew up in the countryside, I spent very little time with horses and I felt they were a little too big and scary.
Then when I moved to New York City years ago, I had a girlfriend who grew up riding horses.
So for her birthday, I arranged for her to ride a horse through Central Park on the bridle path.
There used to be a stable on the Upper West Side.
So we went to the stable.
She got on the horse and we headed over towards the park on a cross street her on the horse, me on foot.
Then we got to Central Park West.
The horse bolted straight down Central Park West.
Cars are slamming on their brakes.
Bicyclists and pedestrians are jumping out of the way.
My girlfriend is hanging on with everything she had.
I guess the horse just wanted to get back to the stable.
To this day, I am amazed that no one was hurt.
But yeah, that was enough horse adventure for me.
Until now.
I loved making the series.
I loved learning about the economics of the horse industry and the science and the soul of it.
There are so many people with so many different reasons for loving horses.
I will probably never become a horse person myself, but...
I see you, horse people.
I'd like to offer special thanks to Constance Hunter, one of the many horse loving economists we spoke with for the series.
If I had not had the good fortune to sit next to Constance at an economics conference, this series wouldn't have happened.
Constance also told me about a horse charity she's involved in called Gallup NYC.
It offers therapeutic riding to disabled New Yorkers.
It's really nice to see that, over a century since horses were displaced as a technology for transportation and manufacturing, that people are still finding new uses for them.
I'd love to hear what you think about horses.
Our email is radio at Freakonomics.com.
We will be back next week with a new episode.
Until then, take care of yourself.
And if you can, someone else too.
Freakonomics Radio is produced by Stitcher and Renbud Radio.
You can find our entire archive on any podcast app also at Freakonomicscom, where we publish transcripts and show notes.
This episode and this whole series was produced with great skill by Augusta Chapman and edited by Ellen Frankman.
It was mixed by Eleanor Osborne with help from Jeremy Johnston.
Special thanks to Nick Nevis for field recording in Kentucky, to Emily Plant for all her help at Keeneland.
Also thanks to the Keeneland team itself and to everyone in Kentucky who gave us their time and their insights.
The Freakonomics Radio Network staff also includes Alina Kullman, Dalvin Aboagi, Elsa Hernandez, Gabriel Roth, Greg Rippin, Jasmine Klinger, Morgan Levy, Sarah Lilly, Tao Jacobs and Zach Lipinski.
Our theme song is Mr. Fortune by The Hitchhikers, and our composer is Luis Guerra.
As always, thanks for listening.
There are definitely people who claim to be horse psychics.
Would you apply the word empirical to them?
Wow, I feel like I'm going to make a lot of my friends mad that use animal communicators.
If a friend like that gets mad, then they're not really a friend.
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