Guide to pricing odds continued
The percentage profit on each event must match. The percentage profit is the amount by which the odds I offer differ from the true odds. In my example, there is a margin of 1.9% if my niece gets it. I price not getting it at odds of 6/5 producing a margin of 5.45% (the amount it varies from the true odds of 6/4). My book is unbalanced and I’m not going to make much money here, whether my poor niece ever gets a piece of cake or not.
So I need to shorten my odds for getting the piece of cake and lengthen my odds for not getting it. I move the 8/13 price to the next shortest price which is 4/7, This means I pay out less if she gets the blue piece making me more money. The outsider odds (of getting pink piece – as there are less of them) are moved to 5/4. That’s a margin of 3.63% for getting it and a margin of 4.44% of not getting it.
Okay. Great, the book is now balanced. Are we satisfied now? The answer is no. Any bookmaker wants his biggest profit on the most likely outcome, because this is where most of the money will go. My niece is most likely to get the blue piece of cake because there is more of them. I want a wider profit margin on this outcome, so, I shorten the price on the most likely outcome. This makes sense, because I am cutting my risk of losing money on the most likely result. This is how bookmakers fix the odds in their favour.
Taking the odds on favourite, getting blue cake, I can increase the profitability by shortening the odds. The next lowest odds are 8/15 giving a profit over the true probability of 5.21%. Adjusting the price of ‘no she doesn’t get it’ to 11/8 makes a margin of 3.64%. Now I’m satisfied because the book is balanced in my favour. I expect the most money to go on the favourite where I’ll make the most profit. Using the cake example you can see how bookmakers aspire to have their cake and eat it!
Do true probabilities exist in sports?
Think of almost any sport and consider how many factors contribute to the outcome of the event. One occasion I can think of is the coin toss at a cricket match. It’s been known for bookmakers to hood wink the public offering heads or tails at 5/6. This results in a profit of 4.55%!
Think about the job of an odds compiler. The price conjured up by the person producing the odds at the bookmakers can never be anything other than an educated opinion. We are pitting our wits against these folk. They can never be right 100% of the time.