How Do Bookmakers Set Odds?
To the bookmaker, pricing up an event correctly is the key to his long term profitability, and to him this is purely a numbers game.
As we mentioned in the previous tutorial, all bookmakers operate by betting to certain in-built margins on different events. For example on Premier League football many bookmakers price up to around 107%, where all the variables are widely known and they could expect three way business.
Where there are more imponderables, for example, a low grade novice hurdle, they would look to bet to around 120% or more to give them some protection from clued up punters.
Although a bookmaker very rarely makes the perfect book i.e laying every runner and locking in a guaranteed profit regardless of the outcome, he knows that by having an in-built margin he is favourite to win long term.
He also has the right to limit the size of bets he lays and to whom, with account and liability management a massive part of how successful any bookmaker is.
A bookmaker will first of all price up the "real" chance of an event i.e to 100% and then alter the prices for the in-built margin he has established for the type of event.
For example, let's consider an international football match, England vs France:
The odds compiler believes the following odds are the true probabilities of either team winning or drawing.
To determine the margin in any betting market, we simply add together the implied probabilities for each outcome.
Total Implied Probability of the Odds = 100%
Because of the fact his customer base is primarily English and likely to pile into the home team given their recent good run, he prices the event up to a margin of 107%.
England to win at odds of 1.54 an implied probability of 64.8%.
Drawn result at odds of 4.22 an implied probability of 23.7%.
France to win at odds of 5.40 an implied probability of 18.5.%. Total Implied Probability of the Odds = 107%
Although an England victory is clearly the most likely occurrence and indeed likely to attract the bulk of the support, the bookmaker is comfortable in the knowledge that he is laying the bets at the "right price" from his point of view. Over a long period of time he will grind out a profit and beat the punter.
This is why it is so important to take note of the margins that your bookmaker of choice is offering. If they are offering markets greater than 105% on popular leagues such as the Premier League, then you're best to shop around and find a more generous bookmaker. However, if you're wanting to be on more obscure leagues, then markets of 110% or even great, can be the norm.