The Revenue Generator
Bookmakers operate with a sole purpose – to generate revenue. Actually, in spite of the common opinion, a bookmaker’s gain does not depend on the number of lost bets, but on how well the coefficients are chosen. What is meant by “well”? It means that every, even the most unexpected outcome of an event has to leave the bookmaker better off.
Forming the Coefficients
Let us have a look at how coefficients are formed. Firstly, analysts determine the teams’ chances. This is accomplished in various ways that can be divided in two groups: analytical and heuristic. Analytical consist mostly of statistics and mathematics (probability theory), heuristic represent experts’ opinions. By combining the results in one way or another event outcome probabilities are calculated. Let us assume that as a result of analysts’ work the following probabilities have been derived:
Even though probability in mathematics is normally indicated by a number between 0 and 1, we will use percent for a ‘smoother’ look. Turning probabilities into coefficients we get:
These are ‘fair odds’, but such coefficients will never show up in the line, otherwise the bookmaker would never get his profit. When inserted into the actual line these coefficients will probably look more like this:
Turning that into probabilities we get:
The sum of probabilities does not equal 100%, but 115% where 15% is the bookmaker’s profit margin that he puts into coefficients.
When starting to accept bets for this line, the bookmaker sees that the bet amounts are spread among these three outcomes in the following proportions:
This means that from every thousand dollars all the players bet in total $75 000 has been bet on 1 winning, $15 000 on the draw and $10 000 on 2 winning. The majority of players bets on favourites most of the time building up the most part of accumulators. Let us think about what the bookmaker’s gain would be from every hundred thousand dollars invested by the players in case of different outcomes:
As a result we can see that in case of the favourite win, which according to logic occurs the most often, the bookmaker will suffer financial losses. If we assume that the teams’ chances had been evaluated correctly, then the favourite wins 55 out of 100 matches and the bookmaker loses $130 625, 25 result in a draw and the bookmaker gains $141 250 and 20 result in the favourite losing and the bookmaker’s gain of $100 000. Hence, after a hundred matches the bookmaker would get a profit of $241 250 risking $130 625 at the same time (for every million bet by players). However, favourites’ losses and draws, which in case of such an outcome bring the bookmakers their profit, are obviously not distributed evenly, i.e. there can easily occur a situation when out of 100 matches a certain favourite comes out ahead in all 100 (even if it means that he loses 90 out of the next 100, which gives the overall statistics the same probability distribution 55% – 25% – 20%), and the bookmaker’s losses would constitute $237 500 for every million the players bet (even though his profit would be $482 500 for the next 100 matches)! This is completely unacceptable for the business and the bookmaker must eliminate even a theoretical possibility of such a situation.
To be continued in Part 2.
