The bookmakers’ business

Understanding the mathematics and mechanics behind bookmakers’ business is essential for the knowledgeable punter. In this article we showed how we can calculate our expected payout of a bet and why we are almost always destined to lose providing that implied probabilities by the bookmakers are fair.

However we defined in which situations value opportunities arise – when true probability of an outcome is higher than the one implied by the bookmaker.

But now comes the question why bookies would deviate from fair probabilities and set some other odds thus creating opportunities for value bets? Nowadays bookmaker houses have at their disposal an army of quantitative staff, technical tools and predictive algorithms so they are ultimately very good if not best in determining the right probabilities for an event. However this is not their ultimate goal.

Bookies need to make money. They do so by trying to “balance the books” in a particular market. In other words their goal is to receive the stakes for the different outcomes in a market in such proportions that they make a profit. No matter what the outcome is. Let’s try to explain this by an example. Consider an over/under 2.5 goals market in European football event:

If the bookmaker receives the bets in the proportions specified in the above example then he will do profit no matter what the outcome is. This is so due to the margin he charges (recall here the concept of bookie’s profit margin) and the right proportion of bets.

However bookies can not control the ratio of stakes they get. Punters’ money flows are influenced by news, favorite teams, gossip and the like. It is very likely that bookies will receive the bets in totally different proportions. One of which is like in the example below.

In the given case if the game finishes Over the bookie will record a loss of EUR 1900 and if it finishes Under then a profit of EUR 2479. This is a perfect example of an imbalanced market from the perspective of the bookmaker. Remember that noone knows how the game will finish no matter what odds are. And knowing that the bookie is there to make profit the only way to get out of this unfavorable situation (where one of the outcomes results in a loss) is to deviate from odds. By doing so he can influence the market and prevent punters from betting on one event, respectively seduce them to mount bets on the other.

Practically if the bookie decreases the odds where he expects losses, i.e. Over and increases the odds where he has expected profit (Under) he can try to balance his book. What if over the course of the next days the bookie alters offered odds and accumulates bets to the following amounts:

Great, by changing the odds the bookmaker has effectively influenced the money flows. He has created a pretty favorable situation in which he is profiting in any way. Simultaneously however this situation also reveals huge opportunities for the bettors. Because the bookmaker deviated massively from initial odds (which let’s assume were the fair odds) he created also opportunities for the experienced punters. Only by changing the odds to balance his books doesn’t mean that the true probabilities for the Over/ Under market changed. Therefore the intelligent punter might have encountered a value bet.

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