Have you ever wondered how sportsbooks make their money? Here we’ll explain how sportsbooks use probability to predict and manage odds.
Some probabilities are easy to calculate – a team winning the coin toss in the Super Bowl, or getting a 6 with a single roll of a dice. However, outcomes in sports events are far more complex and require considerable thought.
Traditionally, that process would typically be undertaken by the sportsbook employees, who would analyse past results in order to predict future performance; research team and injury news, weather forecasts; apply a blend of mathematics and old school judgement.
These days, with a global 24/7 business to run, much of the pricing you will see is outsourced to other companies rather than emanating from the sportsbook itself. Those companies will use their own in-house resources as well as paying attention to other price sources from around the world. As a result of many sources of wisdom, the output is a solid estimation of probabilities of sports events happening.
How do sportsbooks use these probabilities?
Well, bookmaking is a business and like all businesses that sell a product they have to sell it for more than it is worth. This means that you, the bettor, will be expected to buy it for more than the bookmaker thinks it is worth.
Consider a single toss of a fair coin. We know that the probability of Roosevelt’s image landing face up is 0.5, or odds of -100. You would reasonably bet $100 to win $100 in the knowledge that it was a fair bet.
Imagine now that a bookmaker offered you odds of -110. By offering you ‘unfair’ odds, he is giving himself an advantage in the long run of winning money from you.
Of course, the sportsbook doesn’t bet on a coin toss (with perhaps the exception of the Super Bowl). The sportsbook offers odds on events that are far less predictable, so in addition to ensuring a long-term profit, it is protecting itself from uncertainty involved in predicting probabilities in sport.
This premium that the bookmaker applies to their odds to ensure that they are “unfair”, meaning they don’t reflect “fair” probabilities, is known in North American parlance as the vigorish or juice. How much of a premium will depend on several factors, but in simple terms, the vigorish should give a measure of protection to the sportsbook whilst putting the bettor at a theoretical disadvantage when he places his bet.
For a simple demonstration of how this works, take a look at the video below:
Read on to understand more about prop bets and future bets.