How are Betting Odds Calculated?

Betting companies contribute to a hugely profitable industry and they do this with a fairly straightforward (at least on the face of it) business model:

  • Set odds on events
  • Take bets
  • Pay the winners
  • Keep the money from the losers

At the heart of every good bookmaker and online betting site is a team who set the odds. Their job is to ensure that the house wins over the long term whilst ensuring that their odds are tempting enough for people to continue betting. This is not an easy balance to make. Generous bookmakers don’t hang around too long but, given the fiercely competitive nature of the industry, neither do those who are overly stingy.

What Chance Does Each Side Have?

Put simply, betting odds are an indicator of how the bookmaker that sets them believes an event will unfold. If a football team is given odds of evens, the bookie believes they have a 50% chance of winning and a 50% chance of either drawing or losing. The odds compilers will go through a raft of data ranging from historical odds to the weather forecast to make their predictions before setting the odds. They will assess past meetings between teams, weigh up home advantage and any injuries, decide what sort of team might be fielded in relation to other upcoming fixtures and, as said, use a host of other information too.

Much of that data will be in the public domain but one advantage the bookies have over most punters is some less well known info, for example through media, pundit and team connections. The other huge advantage they have, of course, is that gauging odds and assessing probabilities is their full time job and they employ sporting and mathematical experts to do it. Hmm, no wonder you never see a bookie riding a bike.

You can work out the implied percentage chance given to any runner by the bookies with a simple formula. For fractional odds (6/4 for example) you take the stake portion of the bet and divide by the sum of the two numbers. So, for 6/4 the calculation is 6/(6+4) which equals 0.4. That means when a runner is price up at 6/4 the bookies are saying it has a 40% chance of winning.

The Over-Round and Balancing The Books

However it is not quite as simple as that. For a start, bookmakers build in an over-round to every market that they price up. This is the percentage of profit that they stand to make from the market if they take an even spread of money on each selection. This over-round decreases the value available to punters with the aim of ensuring that the bookies remain profitable. As such, whilst an even money shot should, in theory, have a 50/50 chance of winning, due to the over-round, the true probability is perhaps closer to 45% – or even less.

A good example to illustrate this is the market on the coin toss in cricket betting. You can wager which side will win the toss and this, clearly, is a straight 50/50 bet. However, you’ll never find odds of evens on this market, with firms usually offering around 10/11 on both sides. 10/11 implies a probability of just less than 48%.
It is also crucial to realise that bookies will rarely, if ever, take an even (relative to the odds) amount of money on every selection that they offer, so they will manipulate the odds further. Imagine a golf market with over 150 runners. The bookies know that they will take a lot of bets on the most popular golfers even if they don’t have a good chance of success. In the Open Championship for example, there are a number of popular players from the PGA Tour who rarely play links golf but will still attract a large amount of bets. The bookies will shorten the odds of such players because they know they can offer odds which represent very little value and still make plenty of profit when the player inevitably fails to win.

This sort of manipulation happens in other sports too. Bookmakers in England will offer much shorter odds on the England football team than bookies in other countries because they know that patriotic punters will have a flutter on their team. The same is true for teams like Manchester United and Liverpool. They have a huge backing among punters in the Far East with loads of money to bet. It is always interesting to see the Liverpool price get shorter and shorter the closer the game gets to kick-off.

This is a two-way street though. The odds are set lower both because the bookies know the punters will take the low odds anyway, but also because the weight of money forces the odds lower. If the bookie maintained what they believed to be the “true” odds on, for example, an England win, they would face a huge loss should England upset the odds and finally win the World Cup (say). In order to try and create a more balanced book, with a profit on all outcomes, they offer shorter odds on England and consequently higher odds on other nations, to try and encourage more bets on England’s rivals.

The odds compilers will take all of this sort of information on board when setting odds for an event with their overarching aim being to balance the books. In modern trading floors much of the work is done by algorithms however it cannot be left purely to the machines. There is still an element of trial and error and of art to the skill of odds calculation and they sometimes get it wrong but not often and rarely for long. The bookies can spot an error quickly when a number of shrewd punters take up a price that they feel offers good value and will quickly rectify any mistakes.

Calculating odds is a complicated business with many variables to consider. Don’t be disheartened though. At the end of the day the bookies are taking a position and often get it wrong. As a punter, your job is to be there whenever we find value and with free bets and enhanced odds offers helping you, it’s not as hard as it might sound.