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How do bookmakers calculate starting price and change their odds?
What does starting price mean when looking at bookmaker odds? Get the true information, so you can make better betting selections
Published on 12 January 2019
Updated on 12 January 2019
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Odds offered by bookmakers are obviously an integral part of betting on football, horse racing, or any other sport. The problem is that they’re so integral, people don’t really think about them!
If Man City are playing Huddersfield at home, you might get odds of 1/6 on City, 2/1 on the draw, and 9/1 on Huddersfield. Most bettors will simply think, “Eh, they sound about right.”
But… are they right? how do odds work? How did the bookie arrive at those starting odds? Do they reflect the actual probabilities of those outcomes? Do they offer fair value? Are they liable to change, and – if so – why?
Those are a whole lot of questions to throw at you, I know, but each and every one of them will be answered in this article. I’ll explain exactly how bookmakers calculate their odds, and the extent to which they reflect actual probabilities.
Let’s get to it.
What's the definition of starting price?
The starting price is the last fixed odds guaranteed price on a betting exchange or bookmaker when the event starts. so, in horse racing this would be the final price before the horses leave the gate, whereas in soccer betting we're talking about when the match kicks off.
Are odds based on probability? Do they reflect the actual result?
The most common conception of bookies’ odds (and even Betfair starting odds) is that they’re based on probability – i.e. how likely it is that each outcome, in a given market, will actually happen.
Is this the case, in reality? The answer is… kind of.
Bookies do start off by calculating the actual probabilities of the various outcomes in a market. In fact, there’s a dedicated department at every major bookmaker whose entire job revolves around doing this.
They’re reluctant to reveal exactly how they carry out these calculations, as you might expect, but we know a few of the important factors they consider. For a straight-up full time result bet, for example, these include a team’s recent form, a wide variety of individual stats, any injuries, which team is at home (and both teams’ home/away records), and so on.
Once all these factors have been taken into account, the bookie will arrive at genuine statistical probabilities for each outcome. They might calculate the chances of a home win at 50%, a draw at 25%, and an away win at 25%.
Despite being considered and informed predictions, however, these percentages will not directly lead to the final odds. I’ll explain why shortly. Accordingly, while odds are “based” on probability, they’re not ultimately a reflection of the probable result.
Understanding the “margin”
To understand how bookies arrive at their eventual odds, you must understand the idea of the “margin”, otherwise known as the “edge” before placing a bet.
Bookies aren’t in business to give you lovely, fair bets. They’re in business to make money. They want to give themselves the best possible chance of doing that on every market they offer. That’s why they bake a margin into the odds and use an tried and tested system across various bet types.
I mentioned earlier that a full time result, 1/X/2 market might have probabilities of 50%, 25% and 25%. You would never get these probabilities in the odds. If the bookies did offer these odds, the chances are they wouldn’t actually make any money.
Instead – when converted to percentages – the odds might look something more like 52%, 26% and 27%. That adds up to more than 100% – it equals 105%, to be exact – and the extra 5% is the bookie’s margin.
Is it “fair”? Not necessarily, but once you know the margin exists, you gain a far better understanding of odds, and of which bets actually offer good value and return greater odds adn therefore profits.
Calculating the “margin”
Whilst it’s impossible to know the specifics of exactly how each bookie arrives at their odds, we can calculate their margins. Again, this helps us to recognise which bets offer good or bad value, and – from a broader perspective – which bookies tend to have more or less generous odds.
Calculating margins isn’t actually very hard. To do so, however, you will need to use decimal odds rather than fractional.
To calculate the margins on a two-outcome market – Both Teams to Score, Over/Under Total Goals, and so on – here’s the equation you need:
(1/Option A) x 100 + (1/Option B) x 100
Let’s say you’re looking at a Both Teams To Score bet. The odds on Yes are 1.10, and the odds on No are 5.40. In this case, your first sum would be (1/1.10) x 100, which equals 90.91%. The second would be (1/5.40) x 100, which equals 18.52%. Add them together, and you get 109.43%. That means the bookie has a 9.43% edge in this market.
Calculating a three-outcome market – like Full Time Result – is done in exactly the same way:
(1/Home Win) x 100 + (1/Draw) x 100 + (1/Away Win) x 100
If we’re looking at a potentially close game, like Chelsea at home against Arsenal, we might get 2.42 on Chelsea, 3.15 on the draw, and 3.40 on Arsenal. By running the calculations, we’d arrive at percentages of 41.32%, 31.75% and 29.41%. The combined odds here add up to 102.48%, giving the bookie a slim 2.48% margin.
What does starting price mean with respect to getting good value? (h2)
Is it really that important to know about margins? Well, yes! The primary reason that’s true is because it helps you to find good value when you’re looking for betting opportunities.
Knowing how to calculate the margins is all well and good, of course, but you need some context. Specifically – to help you find value – you need to know a reasonable margin from a harsh one.
Bookies will always include a margin, to help them make money overall. It might not seem “fair”, but it’s a fact of life. This will typically range from 1% all the way up to 20%. The industry standard margin is around 5%, so – generally speaking– you want to be looking for something at or around that. Obviously the lower the margin, though, the better value you’re getting.
If you run some calculations, and you find that your usual betting site consistently includes a margin of over 5%... it might be time to start shopping around for a new bookie!
So… why do odds change from the early fixed odds?
As you probably already know, just because the odds have started at one set of values, does not mean that they’re going to stay there. Bookies will usually publish their odds far in advance of a given match. By the time that match actually begins, the odds may have changed significantly.
I’ll explain why this happens in more detail in a future article…In short, however, it’s a response from the bookie to betting action from the general public.
Their odds were calculated in a way which both invited action, and protected them from over-exposure. If the public piles in on one side, it implies the bookie miscalculated the odds in one form or another. They will subsequently adjust those odds (pretty darn quickly), to invite action on the other side, and therefore balance their risk.
In certain cases, therefore, it can be a smart move not to take the initial fixed price as this sometimes may offer best odds, if you don’t think they offer good value. Instead, you might want to hang back and see if they change to something more favourable, but this removes the benefits of a fixed-odds betting market and menas you have to be more aware of the changing odds.
If you’ve spent any time whatsoever on a betting website, you’ve almost certainly seen “enhanced odds” being advertised. Just about every major bookie under the sun offers them, after all.
In the context of odds calculations, enhanced odds actually offer a fascinating proposition. I’ve outlined already how bookies include a margin in their markets. Well, enhanced odds are the rare example of markets where this isn’t always the case. Often, they’ll contain no margin at all. In certain cases, they’ll even have a negative margin, where the total probabilities add up to less than 100%.
In doing this, bookies are removing their built-in advantage, and increasing their chances of taking a loss. So… why do they bother?
For the most part, it’s a marketing ploy. Bookies can list enhanced odds as one of their array of special offers, used to entice new bettors into signing up with them. Even though they might take the odd hit on these markets, they’re (correctly) calculating that the long-term revenues they get from new customers will outweigh those losses.
Enhanced odds can also be used to spice up a slow market. If the bookie isn’t getting enough bets on a game, they can offer enhanced odds in order to ramp up the action. These deals are often advertised in an eye-catching way on the bookie’s website, after all, meaning punters get drawn in to the market.
We all know that betting is far from easy...
The fact is that – over the long term – most football bettors will run a loss.
Critics of gambling in general will say that this is because the game is fixed against them – the house always wins, and so on. To an extent, because of the margins which bookies include in their odds, this is true.
I would argue, however, that a far bigger cause for this general failure is a lack of knowledge, even for something as fundamental as odds. As I mentioned in my introduction to this piece, the vast majority of people barely even think about how bookies arrived at their odds in the first place, never mind whether or not the odds actually offer good value.
By reading articles like this, you’re putting the effort into educating yourself about football betting. In doing so, you’re already getting ahead of the competition. You know now how bookies calculate their odds, and how those odds are tilted in their favour. Armed with this knowledge, you can start working out for yourself which markets offer good value, and which you should steer clear of and fundamentally, what does starting price mean when you look at the bookmaker odds.
Tags: Bookmakers, odds
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