How do bookmakers establish odds if sports events are unpredictable, considering the multitude of factors at play that prevent precise probability estimation?
In: Mathematics
The market is usually led by “sharp” Sportsbooks. These books don’t limit or ban sharp bettors (those who consistently profit) from betting with them. Instead, they use their bets as a data point.
As with any large-scale, efficient market, the law of large numbers will guide the Sportsbook to the most accurate line via betting activity. If a stock price is too low, there will be a rush of people purchasing the stock which drives the price up. If a point spread is too large or small, there will be an influx of bets towards one side or the other, which will drive the spread towards a more accurate number. This “market consensus” isn’t always accurate, but in the long run, over thousands of games/bets, tends to be very accurate.
Sportsbooks also have the benefit of knowing their users. They have all of their data and betting history. Someone who randomly bets with no logic/pattern, or someone who always bets on the same team, etc. is different from someone who consistently places bets on lines before they move in their favor, and is a profitable bettor over the long term. Sportsbooks can therefore identify certain bettors as “sharp” and give more weight to their bets when deciding whether to move a line.
Before books can gather all of this betting data, they have to set an opening line. For example, for a point spread on an NFL game on Sunday, a book might open up betting on the preceding Monday. They come up with their best guess of the spread based on their own sophisticated models, and that becomes their opening line. At first, they won’t allow large bets to be placed on this line in order to limit their risk. Over the course of the next several days, they’ll adjust their line based on bets they receive. If a lot of sharp bettors are placing bets on one side, they might determine their line needs to be adjusted. As it gets closer to game time, the book will slowly increase their betting limits as they become more and more confident that their line is accurate, based on their own models + the valuable data of the betting market (bets being placed, particularly from sharp bettors).
All Sportsbooks have their own models and have to set opening lines, but generally speaking, many of the smaller ones will follow the lead of the sharper Sportsbooks. If a couple of the sharp books move a point spread, the rest of the market generally follows.
Latest Answers