Notoriously the most famous horse race in the world, the Kentucky Derby is also one of the most interesting economic markets. With millions of dollars flowing into this race for three-year-old thoroughbreds, this unique event is historically an indicator of economic success and growth. Thoroughbred horses are costly and unpredictable investments. The prices paid for a thoroughbred reflect the general willingness of horse owners to take risks and therefore a forecaster of the risk-taking atmosphere of the country in general.
The cost for a Kentucky Derby horse can range greatly, with the most expensive winning derby horse having a purchase rate of $4 million USD (ESPN). In 2014 the median cost for a derby horse was $200,000 USD. A winning horse can have returns of up to three or four times their worth. In periods of economic downfall such as the recession of 2008 the Kentucky Derby also ...view middle of the document...
The utility function shows how utility (a subjective measure of satisfaction) is dependent on wealth. In this example, as the wealth of potential buyers increases, the utility function becomes flatter. That is, the wealthier the buyers, the less impact buying a losing horse will have on their utility. As seen in Figure 1 as wealth increases, utility decreases.
When utility is leveling out for the demographic that is buying horses to race there is a direct correlation of utility leveling out in other aspects of the economy. When investors are willing to take risks with horses and other gambling situations they are also more likely to take risks in the stock market. When deciding how to allocate their savings, people have to decide how much risk they are willing to undertake to earn a higher return. Putting ones money in a savings account, while it may be a less risky option is also an option that may not return several million dollars as a racehorse may.
The cost of racehorses is not the only risk related economic indicator associated with the “fastest two-minutes in sports” however. The Kentucky Derby as well as being one of the largest markets for a big-ticket item is also one of the largest markets for betting and gambling. The Kentucky Derby generates a substantial portion of its revenue from bets wagered at the event. In 2013 total betting was equal to $130.5 million USD (Kleintop 2).. In 2013 a winning bet of $1 could return $3,462.80.
Wagering is an interesting concept when looking at utility function. In theory gambling fits into the utility theory nicely, with utility flattening out as wealth increases. What this theory fails to include is the inherent satisfaction gained from gambling. Many people at the Derby are wagering purely for the experience and the thrill they gain from watching their horse barrel along the course. This throws a spanner in the utility theory because utility (a measure of satisfaction) is increased purely by the activity itself, not the financial outcome.