Why Bookmakers Get Prices Wrong….and How to Spot Value

When Leicester City travel to the Emirates Stadium on Sunday to take on Arsenal, they do so as a 4/1 outsider. Now, if you are capable of time travel and can go back 12 months or so, that price would perhaps be a fair reflection of the relative merits of these two sides.

But as smart punters we know that a price of 4/1 on a team that a) has beaten Man City and Spurs away from home in recent weeks, b) has conceded just three goals in their last eight games, and c) tops the away form table, is borderline offensive.

This got us into thinking: how do bookmakers actually set their prices, and do they ever get them wrong?

Against All Odds

There isn’t really room here to reproduce a full essay on how each bookie sets their prices, but in short they employ a team of quantitative analysts and traders whose job is to set odds based on a number of parameters which include form, league position, quality at home/away and a host of other external factors.

But the key item for consideration is profit margin. Each market has a ‘float’ built into it that ensures that no matter what the outcome, the bookie won’t be hit too hard financially should either the favourite or the outsider triumph.

There’s an example on the Betfair website here that we have reproduced below for clarity.

So Andy Murray is playing Rafa Nadal, and the Scot is the 8/15 favourite with the Spaniard priced at 11/8. To calculate their margins, the bookmaker will transfer these traditional odds to European prices – so Murray becomes 1.53 and Nadal 2.37 – and then add these together in the following equation:

Profit margin: 1/1.53 + 1/2.37 = 107.6%

What those clever boffins at your favourite bookie have done is built in a safety catch to their prices that ensure that no matter how much money is bet on the favourite or the underdog, they will still take home around 7% in profit. In truth, this figure is generally closer to the 10% mark.

Price Changes

Like any business, a bookmaker will move to protect itself when market forces determine swift action.

Say for example that the Leicester team is beset by a stomach bug, and they now have to resort to picking fringe players and youth team prospects in their squad for the trip to Arsenal. This news will become common knowledge in rapid fashion thanks to social media and the like, and no doubt a deluge of money will then be wagered on the Gunners.

And this is where bookmakers earn their corn. They will have their fingers on the pulse, and will have already calculated their odds to reflect the situation. So you know all that cash that now gets plundered on Arsenal? Guess what: the bookie has already built their 10% into the revised price. Lengthening the price of Leicester to, say, 8/1, will also entice punters and this will help to create additional profit too.

In truth, bookmakers very rarely set their prices ‘wrong’ – and when they do they can hide behind the excuse of palpable error (which is a whole other discussion for another time), which minimises the damage caused.

Spotting Value

Of course, while a bookmaker is very diligent in odds setting, we can as punters identify value that takes advantage of their occasional generosity. In their away wins over Spurs and Man City, Leicester were priced at 3/1 and 13/2 respectively. Value? Damn straight, particularly as the Foxes have lost just one away game out of thirteen.

And this is where the advantage can sometimes go to the punter: we may assume that Arsenal will beat Leicester on Sunday because of historical bias and the sense that the Foxes are somehow punching above their weight, but in pure footballing terms Leicester should be priced at Evens or even shorter given their current form, gift for winning away from home, league position etc. This is spotting value.

Here’s another example. Imagine that Team A and Team B have both gone Over 2.5 Goals in eight of their last ten games (80%), and are meeting on Saturday. Now, we might infer because of this that there is an 80% chance of their match going Over too (this isn’t mathematically correct for a few reasons but let’s assume it is)….

An 80% chance of something happening would be reflected by a probability of 4/5, and so bookies should offer odds of 1/5 to offset that in their markets (plus a little extra for their margin). If the price is any longer than that, then you have identified value friend!

Of course, this example isn’t perfect, and it is impossible to calculate the theoretical probability of something happening in a sport as unpredictable as football. If it was, many of us would be living it up in Hawaii right now after making millions from betting.

So while bookmakers very rarely price their odds wrong, that doesn’t stop well informed punters from taking advantage of what we might consider value bets. We might have a quid on Leicester ourselves….