How do bookmakers establish odds if sports events are unpredictable, considering the multitude of factors at play that prevent precise probability estimation?
In: Mathematics
It’s been said that their goal isn’t to predict the outcome of the game but to balance out the bets. If 50% of the money is on team A and 50% is on team B, they are guaranteed to profit off the “vig” – a fee that the winner pays. This is true, but an unsatisfying answer.
The obvious question is what if they get the odds wrong? What happens if 90% of the money is bet on team A? In that case, the bookmaker simply shifts the odds in team B’s favor. This incentivizes more money to be placed on team B. The odds will shift as far as needed until the bets are evened out.
So the real answer is that they simply don’t establish odds. They bookmaker will put up a best guess odds to start taking bets but will adjust as needed to keep the bets balanced. They just need a number to start taking bets. They’ll adjust as needed to balance out the money. Ultimately, the bettors establish the odds as they place bets.
They don’t need to know the exact probabilities. They need to make money and for that to happen they need to make sure that the total wagered is more than the total payouts.
They don’t need to know who will win. What they need is to estimate how much money people will bet on an outcome depending on the odds offered. People’s tendencies are much much easier to predict than sports outcomes.
On top of that, odds are not set in stone. If a bookmaker offers 50/50 odds but 90% of the money is being put on one outcome, they start adjusting the odds so that the payouts are the same regardless of the winning outcome.
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