How does your bookmaker calculate its odds?Posted by: Mitko Atanasov in Jul, 2012
Trying to find out how do bookmakers calculate odds? I will try to sum it up with brief examples, so you truly understand how you bookmaker calculate its odds.
Although there are a lot of materials on this topic around the Internet, I have found them a bit confusing and hard to understand.
A good sports punter has to know the real probabilities in order to make a good pick, therefore a good bet and profit.
Don’t be surprised when I tell you, that the coefficients you see when you bet on games, are actually far away from their “true” value.
Let’s look at the following example, that I will use in this article, to make things more clear for you(or at least try to):
Say that we have two teams playing against each other: Team-A and Team-B and their true probabilities are the following:
Team A: has 55% chance of winning
Team B: has 25% chance of winning
A draw between the two sides: 20% chance
When you sum up the above percentages you get 100%, which means that if the bookmaker offers you those odds they will neither win nor lose. So in order for them to profit they modify the original values to something similar like the ones below:
Modified by BookmakerX:
Team A: has 54% chance of winning after modification
Team B: has 32.4% chance of winning after modification
A draw between the two sides: 21.6% chance after modification
Now the sum equals to 108% which will guarantee BookmakerX a profit of 8%. Most sportsbooks have similar profit margin. The book with some of the lowest margins is bet365.com. The also have perhaps the highest football odds on the internet.
In European format, these odds are displayed as coefficients:
54% = 1.85
32.4% = 3.09
21.6% = 4.63
At these odds, the sportsbook pays out the player’s stake multiplied by 1.85 or multiplied by 3.09 or multiplied by 4.63. To keep things simple here’s what I am talking about:
Using these figures, we can calculate back to 8%: the amount of profit the bookmaker will take:
For each £100 staked, £50 would be on Team A to win, £30 on Team B to win, and £20 on a draw.
If Team A wins, the bookie pays out 50*1.85 = £92.50
If TeamB wins, the bookie pays out 30*3.09 = £92.70
If the game ends a draw, the bookie pays out 20*4.63 = £92.60
This would be perfect for the sportsbook if everyone bets according to the odds. However we all know, that punters bet on whatever they feel like, or based on statistics or whatever. This means that even though Team B has only 32.4% chance of winning, a lot fans of the club would bet on it.
What happens then and how it affects the odds, check below:
70% of all money are placed on Team A to win
25% of all money are placed on Team B to win
5% of all money are placed on a draw.
For every £100 staked, the sportsbook will take £70 on Team A, £25 on Team B, and £5 on a draw.
If the bookmaker offered odds as per the ‘true’ probabilities – and not as per the actual spread of stakes, for each $100 they received, they would pay out (with profit margin accounted for):
If Team A wins, BookmakerX pays out: 70*1.85 = £129.50
If Team B wins BookmakerX pays out: 25*3.09 = £77.25
If the game finishes draw BookmakerX pays out: 5*4.63 = £23.15
You see now that this is not a very good business model, because in some cases the SportsbookX will win money and in some will lose. So instead, the SportsbookX aims to make a consistent profit by calculating the odds based not on the likely outcomes, but rather on the spread of stakes that they expect to receive on the different outcomes.
So a sportsbook expecting the following stakes:
70% of all money to be placed on TeamA to win
25% of all money to be placed on TeamB to win
5% of all money to be placed on a draw.
will adjust its profit margin at 8% profit, so the percentages will be really the following: 75.6% / 27% / 5.4%
And converting these figures to odds:
1.32 Team A to win
3.70 Team B to win
18.52 for a draw between the two sides (Notice that due to the much higher percentage of money placed on Draw, the odds are much lower, but the sportsbook profit is kept.)
So on each £100 staked:
If Team A wins SportsbookX pays out 1.32*70 = £92.40
If TeamB wins BookmakerX pays out 3.70*25 = £92.50
If it’s a draw BookmakerX pays out 18.52*5 = £92.60
Thus the bookmaker’s profit is between £7 and £8 = 8%. (Rounding of figures dictates that the profit is not always precisely 8%.). One of the books that we recommend and that works with some of the lowest margins (hence higher odds for you) is bet365.com. Open an account with them today, and you will get a 100% first deposit bonus of up to £200 and access to over 40,000 live streamed events per year.
Bookmakers employ further formulas to calculate adjustments to make to odds depending on the actual money flow on each outcome of an event. This is why you won’t ever see a draw with the odds of 18.52, but this is what I used in my example here.
For information on which books have the best odds and will treat you well as a punter be sure to read our Sportsbook reviews section.
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