All sports bettors seek some or the other way to get the better of the bookmakers. However, gaining a deeper understanding of the odds calculation is only half the job done, the remaining half is about learning about the bookmakers’ operations. Let’s find out about the methods that make bookmakers like Bet365 their money and how professional bettors can still be profitable. On a side note, if you’re for a portal where you can find all details related to Bet365, including the bonuses being offered by them, is a portal you cannot afford to miss!
When it comes to sports betting, the idea of making a book is the process of laying bets on outcomes of different events. The term has been derived from the practice of bet recording in hardbound ledgers, thereby leading to the term bookmakers in the English language.
Bookmakers have existed for thousands of years, operating in one form or another. Their role is actually quite similar to stockbrokers. Bookmakers accept money from many people interested in betting on certain outcomes, and then pay out winners once the event has finished. What they earn is a fee, also referred to as the margin in the betting parlance, in return for their services. Their main aim is registering some profit from the whole activity.
The mathematics involved in bookmaking
Online sports betting companies such as Bet365, Betfair etc. normally have huge teams of people, known as odds compilers or traders whose main job is setting odds based on the popular public opinion and statistical probabilities, which are as close as possible representations of the actual chances of every outcome, with the margin added to each one of them.
It should be noted that it’s a fairly difficult job to account for all different variables involved in different sports events. These traders have to factor in the team/player form, injuries, crowd influence, the referee etc. for every match. Once they have considered all these variables, they calculate the actual chance of a certain outcome, and then price it up after adding the bookmaker’s margin.
For instance, following the odds set by Bet365 for a certain football match between Chelsea and Tottenham:
... / Odds / Probability (Implied)
Chelsea win / 1.531 / 65.32%
Tottenham win / 4.540 / 22.03%
Draw / 6.810 / 14.68%
Once you add up all the above-listed probabilities, you arrive at a total percentage of 102.3%. It means that the bookmaker or online casino has added his own profit margin of 2.3%, presuming that there will be balanced action on all the ends.
In the same way, any football match may be priced anywhere ranging from 101% to 125% depending on the betting action and the specific market. For instance, majority of Premier league matches get priced up to the level of 104%.
One of the main goals of all strategic long-term sports bettors is to maximise their profits by obtaining the best odds from the bookmaker or online casino. As is evident, higher bookmaker margins means poorer odds for the sports bettors, thus impacting their long-term returns. Therefore, it is very important for sports bettors to be aware of the bookmaker margins before betting with them. In case a bookmaker or online casino offers popular markets, for instance the ones related to Premier league matches, at a price higher than 104%, you’d be better off shopping at some other bookmaker with lower margins. Markets of 110% or higher are actually the norm when it comes to less popular leagues.
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About odds fluctuations
Unlike sports bettors who are in the business of predicting outcomes of various matches or games to earn money, traders rarely get involved in such gambles. Their main priority is ensuring that they receive bets on all possible outcomes of games in a proportional manner, also referred to as balancing the book, in order to register a certain amount of profit, no matter which outcome eventually emerges as the winner.
Traders keep a close watch on the movement in the stakes, after the odds are published, and how those stakes get distributed between different outcomes. The odds normally remain stable in the event that the stakes are placed based on the traders’ calculations. However, any time that a significantly large amount is bet on a particular outcome, the odds may be recalculated accordingly.
Let’s take the example of the Chelsea vs Tottenham match that we talked about earlier. Let’s assume that 100 sports bettors placed £ 10 bets each in the following manner:
... / Odds / Distribution of bets
Chelsea win / 1.531 / 75%
Tottenham win / 4.540 / 15%
Draw / 6.810 / 10%
Now, if Chelsea indeed goes on to win the game, the bookmaker or online casino will collect a total of £ 1000, however will need to pay out: £ 750 x 1.531 = £ 1148.25 to the winners. In such a scenario, the odds are most likely to be readjusted as the software employed by traders will start showing a loss for them.
Please keep in mind that all these adjustments are continuous in nature and are performed on a regular basis by bookmakers to keep their books always balanced. Any fluctuation in odds creates an immediate scope for indulging in arbitrage betting, for the sports bettors.
Registering consistent profits
In arbitrage betting, the odds set by different bookmakers are utilised in a manner that it results in an aggregate margin which works out in favour of the sports better, resulting in a proportionate profit for him. Let’s now throw some light on the longshot bias and how bookmakers benefit from it.
The tendency of overvaluing longshots and undervaluing the favourites is commonly seen in the field of finance and sports betting, and is referred to as the longshot bias. All bookmakers apply a certain margin to their betting odds, in order to make sure that they earn some profit. They do this by shortening the odds as per their fair expectation of every outcome. So, for instance in case of a two player game, wherein the odds of Player X winning are ‘x’ and Player Y winning are ‘y,’ the bookmaker margin can be worked out using the following formula:
Bookmaker’s Margin = [(1/x) + (1/y)] x 100%
You’ll always see this sum working out to 100% in case of fair books as it actually reflects the sum of all the probabilities applicable to all possible outcomes. However, this sum is always higher than 100% for all bookmakers. The excess percentage is referred to as the juice, vig or overround. But there’s far lesser clarity on how bookmakers load their margins - all of it on Player X, all of it on Player Y, or by spreading it evenly across both the players?
How this margin is added to betting odds?
Common sense says that liabilities can be best managed if the margin is spread equally over all the players. For instance, in a game where two players are evenly matched, the fair odds on them would work out to 2.00. Now, application of a 2.5% margin on both the players, would result in shortening of their odds from 2.00 to 1.95.
However, what do you think happens in contests involving underdogs and clear favourites, for instance, wherein betting odds are something like 6.00 and 1.20? Evenly distributing the margin would result in odds shortening to 5.85 and 1.17 respectively. But, this isn’t what normally happens.
Rather, you’re more likely to see the odds getting revised to something like 5.41 and 1.19. The odds applicable to the underdog are shortened much more compared to the odds for the favourite. Talking about the margin percentages, the underdog’s margin is 11%, while the favourite’s margin is only 1%. Why so? This can be attributed to the traditional concept of longshot bias.
Longshot bias examples
A significant amount of evidence is available in the sports betting world showing that longshots normally have disproportionately shorter fair prices compared to the favourites, and this holds true in tennis, football, horse racing and many minority sports.
A paper published in The Economic Journal in the year 1997 by David Paton and Leighton Vaughan Williams of Nottingham University Business School revealed a major longshot bias in the UK flat racing of the 1992 season, in a sample of 481 races featuring 4689 runners.
All bets placed on runners who were priced shorter than 2.00 (even money) witnessed merely 7% losses, in stark contrast to the bets placed on longshots at over 40/1 which lost more than 40%. Another paper published in the year 2000 in Scottish Journal of Political Economy showed clear evidence of longshot bias in Scottish and English Football League games played in the 1991 – 92 season, wherein only 2% losses were seen in bets placed shorter than 1.66, however, 15% losses in bets over 5.00.
Bookmakers having larger margins normally have stronger longshot biases, and the extra margin is loaded primarily on the underdog. For instance, if we look at the game between Coric and Djokovic in the second round match of the Madrid Master’s 2016 edition, a prominent online casino cum bookmaker had priced these players at 13.00 and 1.06 respectively. In contrast, another popular online casino cum bookmaker had priced these players at 8.00 and 1.05 respectively. Quite clearly, the significant difference between these two bookmakers can be attributed to the longshot bias.
Betting on longshots
Many explanations have already been given for the existence and prevalence of longshot bias, including the responses received from bookmakers with regard to insider information, and how high and low probabilities have been misjudged based on certainty and possibility effect predictions.
In this, sports bettors are believed to be expressing risk-seeking utility towards the longshots, while expressing a certain degree of risk aversion towards the favourites. The application of nonlinear probability weights in the formulation of these utility preferences is mainly due to misperceptions of the involved probabilities. If we look closely, longshot bias is actually a representation of a regular cognitive bias.
With sports bettors indulging in over betting on longshots, bookmakers naturally shorten their prices in order to manage their liabilities. However, some of the experts have proposed that bookmakers may sometimes intentionally exploit the sports bettors’ biased preferences instead of reacting to them.
As majority of sports bettors are seen making their judgements, especially with regard to the longshots, bookmakers like Bet365 etc. may heavily shorten those prices only because they’re in a position to do so. In contrast, the demand elasticity of sports bettors with respect to the favourites is far greater, and resultantly there is a much narrower range in the favourites’ prices across different bookmakers having different margins. Therefore, if you are solely interested in booking long-term profits by betting mostly on the outsiders, ensure that you pay the right value for it.