Hong Kong Numbers Game

There are three numbers quoted in this article in The Standard:

- According to a survey conducted by Hong Kong University, 0.4% (or 20,000) adults in Hong Kong placed bets on horse racing through illegal bookies.  There is no time frame given in the article (For example, in the last 12 months? ever?)

- According to Hong Kong Jockey Club chairman Ronald Arculli, between HK$50 billion and HK$60 billion in horse-racing bets are placed with illegal bookies.  There is no time frame given in the article either.

- According to the Hong Kong police, HK$10 million in soccer betting receipts were confiscated by the police last year.

Assuming that the first two numbers are for the same time frame (e.g. 12 months), then the average annual amount of illegal horse racing bets is HK$60 billion / 20,000 = HK$3 million per person.

Hong Kong Gambling Watch convenor Reverend Wu Chi-wai was quoted as saying: "It was an astronomical figure. How is it possible that these punters could place an average of HK$3 million each a year with illegal bookies?  It is obvious that the HK$60 billion turnover is an overestimation. I believe the Jockey Club is just trying to put out this figure to seek Legco support.  "The club should at least provide another more persuasive reason and not treat the public as idiots."

There are many issues with the interpretation of these numbers.

Let me start with the spurious number that was presented above -- HK$10 million in confiscated soccer betting receipts.  First, the subject here is horse racing bets and soccer betting is indicative but not directly related.  Second, the size of an underground economy cannot be estimated from the manifested data alone.  HK$10 million is a lower bound.  This is like estimating the size of a iceberg from looking at the tip.  How many people do not think illegally downloaded movies in Hong Kong last year?  The police reported that one person was arrested and convicted.  Do you accept one as the estimate of the total number of illegal downloaders?  Of course not.  So we will ignore this number in the discussion.

Let me then deal with the Hong Kong University survey estimate of 0.4%.  I have no reason to challenge the survey methodology.  I have grave doubts about whether to believe the responses.  You can imagine that you are at home and the telephone rings.  It is a survey interviewer.  You agree to participate.  Somewhere in the interview, you are asked, "Have you placed a bet on horse racing through an illegal bookie in the past 12 months?"  Would you really admit to an illegal activity to a stranger over the telephone?  I wouldn't.  So I suggest that 0.4% is an under-estimate of the incidence.

For argument's sake, let us accept the HK$60 billion and 20,000 figures.

For the HK$3 million per annum figure, we should remember that this does not mean that the average illegal gambler spends HK$3 million per annum on betting.  In real life, people sometimes win money when they gamble.  For example, playing roulette results in a loss of $0.053 for each $1 bet, which means that if you play roulette over one year with 3 million HK$1 bets, you will end up losing $HK159,000.  You do not lose HK$3 million.

What are the odds in betting on horse races?  The payout is set by the Hong Kong Jockey Club, but the illegal bookies offer heavy discounts.  For example, you can call up your bookie and place a HK$10,000 bet.  If you win, you collect the full payout amount as announced by the Hong Kong Jockey Club; if you lose, you may only have to pay HK$8,000 or some such to your bookie.  Why can your bookie offer such a steep discount?  For one thing, the Hong Kong Jockey Club is required to set aside part of the pool for charity purposes (such as education).  For another thing, the Hong Kong Jockey Club has heavy overhead expenses such as the race tracks, the stables, the prize money, the off-track betting parlors and the thousands of employees.  By comparison, your bookie is his own charity and his office is his mobile telephone.  So an average illegal bettor may outlay a lot less than HK$3 million.

Then there is the question of whether these bettors are actually typical with respect to their probability of winning.  Suppose you are a small-time bettor who plays HK$100 bets.  The bookie probably does not even want your business because these small bets are just a bookkeeping nuisance for him.  More likely, the illegal bettors are big-time gamblers.  Suppose that you have a winning system, or an insider tip, or you actually rigged a race for a long-odds horse to win.  How would you place your HK$200,000 bet?  You are not going to place the money down at the race track because it will drive the 100-to-1 odds down to 5-to-1, and then everybody else will notice the huge drop and rush in to drive the odds even further down.  Rather, you will place the bet with your bookie.  The bookie knows you pretty well and when you place that HK$200,000 bet at 100-to-1 odds, he knows that he better do something to cover his position.  If he has the smarts, he will place similar bets spread around many other illegal gambling syndicates.  He creates a hedge position in which he does not stand to lose much one way or the other.  Now you understand how these 20,000 people may just be betting as much as HK$3 million per year and they may even be winning money.

This whole fuss is about the Hong Kong Jockey Club ostensibly losing revenue to illegal gambling.  It is well-known that there are two things that can turn things around.  One is a product issue.  They must become economically competitive in terms of payout and they must make it convenient to use their service.  For the reasons stated above, it will be hard to be economically competitive.  The proposal on the table is to offer discounts to the big-time bettors who are believed to the core illegal gamblers.  The other is a law enforcement issue about how the police can crack down on the practice.  This is also hard because there is no central location with a telephone bank and slips of paper anymore.  Instead, it is some guy with a mobile telephone and a computer with strong encryption on his files.