How bookmakers create their odds

Before entering the betting world in detail, let’s see how bookmakers create their odds for a given event.

To make it simple, let's take a football match as an example and suppose we are the bookmakers who are to determine the odds for the football match Milan – Rome.

According to the statistics regarding the two teams (victory of the home team, home draw, defeat, classification scores, player’s physical fitness, team motivation, goals scored, goals endured) and several other factors of minor importance, the bookmaker’s shareholders determine the probability of each event, by ascribing the following percentages to each result:

  • Milan (home) win: 40%
  • Draw: 32%
  • Rome (away): 28%

and on the basis of these percentages, the related table of odds (outcome probabilities) by multiplying the reverse of the percentage of outcome probability by 100 as follows: "

  • Home win: Odds = 1/40*100 = 2,5
  • Draw: Odds= 1/32*100 = 3,125
  • Away win: Odds= 1/28*100= = 3,571

As a matter of fact, the odds offered to the punters do not correspond to ones above for this reason: if the distribution of bets among the various results followed exactly the one calculated according to table above, the bookmaker would gain no profit at all.

Let's say 100 punters bet 1 Euro each: if 40 bet on the home win, 32 on a draw and 28 on the away win, the bookmaker will collect a total of 100 Euro, but he will still have to pay 100 Euro for the win, no matter the result of the match.

Thus, each bookmaker elaborates his own table of odds, a sort of balanced book where they set their odds while keeping their own margin of profit into consideration. Below is an example of such table:

 

Table of odds
Milan (Home team)
2,4
Draw 2,9
Rome (Visitor)
3,3

This is a fairly good table of odds, but since many bookmakers operate under a sort of “oligopolic” system, it will be rather hard to find tables of odds in favour of the punter. In order to determine whether bookmaker’s odds are “good”, just sum the reverse of the odds and multiply the result by 100. The more the value exceeds 100, the less favorable the odds for the punter. Vice versa, if the value was lower than 100, it would be a "sure bet", although it is not possible to place such a bet at one bookmaker at the same time.

 

Odds dynamics

Let’s say our bookmaker has published a table of odds for each one of his scheduled sports events and the punters’ stakes start coming in.

The bookmaker constantly monitors the flow of stakes and how they are distributed among each result. If they are distributed according to the bookmaker’s initial calculation of probabilities, they will not need any adjustment. On the contrary, if many stakes happen to be placed on one result, bookmakers might end up with no margin of profit.

Suppose the stakes of the 100 punters mentioned earlier are distributed as follows:

  • 1: 50%
  • X: 30%
  • 2: 20%

In this way, if there is a home win (result 1), the bookmaker will collect 100 Euro but at the same time, he will have to pay out a total of 50*2,4= 120 Euro to the 50 punters. The software used by bookmakers will start to indicate a loss and the odds will have to be adjusted. Presumably, the odds offered for the home win will be lowered and those offered for the away win will be raised, since only 20% of the punters placed their bets on the latter, against the predicted 28%.

These adjustments are continuous and are carried out by all bookmakers. The variation of odds, in certain instances, allows for "sure bets" and are beneficial to both parts: the bookmaker (in that stakes that come in will rebalance the volume of bets) and the traders, who make use of such method.