August 1, 2011 12:51 AM Subscribe

How do Vegas oddsmakers make their odds?

Do the odds in Vegas come out of actual predictions about who will win, or are they more of a prediction of how people will bet? If someone is a 4-1 favorite, is that because Vegas actually thinks they're a 4-1 favorite, or they just think that will result in the most even betting? Is it different for different sports?

Do the odds in Vegas come out of actual predictions about who will win, or are they more of a prediction of how people will bet? If someone is a 4-1 favorite, is that because Vegas actually thinks they're a 4-1 favorite, or they just think that will result in the most even betting? Is it different for different sports?

Bookmakers don't usually have better information than anyone else, and they don't like to gamble. They want to take in a mixture of bets at odds that ensure they will make money no matter who wins. If their "book" is unbalanced in favor of one or more contestants then they can try to lay some of those bets with other bookmakers, or they can lower the odds on the popular contestants to encourage bets on the less popular ones.

posted by Joe in Australia at 3:21 AM on August 1, 2011

posted by Joe in Australia at 3:21 AM on August 1, 2011

Oddsmakers care less about being right then they care about eliminating risk. Odds are designed to put even money on both sides of the bet. Parimutuel betting (like for horse racing) is by definition even odds, but spread betting needs to be balanced via the odds.

Inside Sports the HBO show had a segment years ago on how Vegas sets NFL odds. Its probably out of date know, but basically it came down to a bunch of oddsmakers sitting in room crunching numbers, and then there was a select group of whales who got the first call with the official odds. If those whales jumped at a line the Vegas guys knew they were off, and so they adjusted the line before releasing them to the public. I mean there are some well known ways in which gambling lines are off. For example Americans love scoring and the favorites - so if you bet the under and the dog on NFL games you'll win >50%, although not enough to make up the fees you pay to book.

posted by JPD at 4:41 AM on August 1, 2011

Inside Sports the HBO show had a segment years ago on how Vegas sets NFL odds. Its probably out of date know, but basically it came down to a bunch of oddsmakers sitting in room crunching numbers, and then there was a select group of whales who got the first call with the official odds. If those whales jumped at a line the Vegas guys knew they were off, and so they adjusted the line before releasing them to the public. I mean there are some well known ways in which gambling lines are off. For example Americans love scoring and the favorites - so if you bet the under and the dog on NFL games you'll win >50%, although not enough to make up the fees you pay to book.

posted by JPD at 4:41 AM on August 1, 2011

All formal betting seeks to create a balanced market. How this is done depends on what the "proposition" is. Proposition being the thing being bet on.

Take a simple boxing match, where the outcome is one guy wins or the other guy wins. (The proposition being "who will win the match?") The house will say "we are now taking bets on the match". As bets pour in, it becomes clear that the first guy is a favorite to win. In fact, twice as many dollars are on that one side. The odds, as determined by the market are 2:1. The house doesn't like to be in this position, because if the other guy wins, they have to pay out more than they took in. So they adjust the odds and start taking 2:1 bets. Meaning, if you bet $2 on the favorite, you get your bet back plus $1. If you bet $1 on the underdog, you get your $1 plus $2.

(If you are a visual thinker, picture a see-saw, with the dollars being bet on either boxer on each side. The house adjusts the fulcrum point so that each side is balanced.)

As JPD says, they will often research the marketplace and set the odds to something besides 1:1 ahead of time so they don't get too far out of balance.

Spread betting is the same thing, but instead of odds, they use the point spread. Which is the difference between the winning team's score and the losing team's score. If the teams are believed to be equally matched, there is no spread and it is a simple win or loss proposition. But more often, one team gets favored over the other. What spread betting does is basically spots the losing team a certain number of points so that the matchup seems even. If the spread is 3.5 (almost always set to an impossible score, so that there are no ties), the proposition becomes "if you add 3.5 to the underdog's score, who would be the winner?". The spread gets adjusted as bets pour in to adjust for changing optimism for one side or the other.

(This is how point shaving got invented. This is where a corrupt gambler pays a player on the team that is favored to win the game to try and make sure that team wins by less than the spread. It takes advantage of the asymmetry of the incentives of the better versus the player. If done correctly, the player and his team still get to win the game, but the player gets a payoff, and the gambler wins his bet.)

Finally, there is pari mutuel betting like in horse racing. This is where there are more than two contestants. At its simplest, betters place bets on which horse will win the race. Those bets are placed in buckets for each horse, and the odds are the inverse of the amount of money bet on a particular horse over the total amount of money bet (the pool).

Simple example: three horses are racing, and $30 says horse A will win. $20 says B will win. $10 says C will win. There is $60 in the pool. The odds for horse A are 1:1. You bet a dollar, you win a dollar. The odds for horse B are 1:2. You bet a dollar, you win $2. Horse C is 1:5. You bet $1, you win $5.

It is much more complicated than that in real life, because there are other things to bet on. You can bet that a horse will come in different places, or on a particular set of horses winning in a particular order. But the mechanics are the same: the pool gets split up based on how much money was bet in total, versus what percentage of bettors chose the right scenario.

posted by gjc at 5:29 AM on August 1, 2011 [1 favorite]

Take a simple boxing match, where the outcome is one guy wins or the other guy wins. (The proposition being "who will win the match?") The house will say "we are now taking bets on the match". As bets pour in, it becomes clear that the first guy is a favorite to win. In fact, twice as many dollars are on that one side. The odds, as determined by the market are 2:1. The house doesn't like to be in this position, because if the other guy wins, they have to pay out more than they took in. So they adjust the odds and start taking 2:1 bets. Meaning, if you bet $2 on the favorite, you get your bet back plus $1. If you bet $1 on the underdog, you get your $1 plus $2.

(If you are a visual thinker, picture a see-saw, with the dollars being bet on either boxer on each side. The house adjusts the fulcrum point so that each side is balanced.)

As JPD says, they will often research the marketplace and set the odds to something besides 1:1 ahead of time so they don't get too far out of balance.

Spread betting is the same thing, but instead of odds, they use the point spread. Which is the difference between the winning team's score and the losing team's score. If the teams are believed to be equally matched, there is no spread and it is a simple win or loss proposition. But more often, one team gets favored over the other. What spread betting does is basically spots the losing team a certain number of points so that the matchup seems even. If the spread is 3.5 (almost always set to an impossible score, so that there are no ties), the proposition becomes "if you add 3.5 to the underdog's score, who would be the winner?". The spread gets adjusted as bets pour in to adjust for changing optimism for one side or the other.

(This is how point shaving got invented. This is where a corrupt gambler pays a player on the team that is favored to win the game to try and make sure that team wins by less than the spread. It takes advantage of the asymmetry of the incentives of the better versus the player. If done correctly, the player and his team still get to win the game, but the player gets a payoff, and the gambler wins his bet.)

Finally, there is pari mutuel betting like in horse racing. This is where there are more than two contestants. At its simplest, betters place bets on which horse will win the race. Those bets are placed in buckets for each horse, and the odds are the inverse of the amount of money bet on a particular horse over the total amount of money bet (the pool).

Simple example: three horses are racing, and $30 says horse A will win. $20 says B will win. $10 says C will win. There is $60 in the pool. The odds for horse A are 1:1. You bet a dollar, you win a dollar. The odds for horse B are 1:2. You bet a dollar, you win $2. Horse C is 1:5. You bet $1, you win $5.

It is much more complicated than that in real life, because there are other things to bet on. You can bet that a horse will come in different places, or on a particular set of horses winning in a particular order. But the mechanics are the same: the pool gets split up based on how much money was bet in total, versus what percentage of bettors chose the right scenario.

posted by gjc at 5:29 AM on August 1, 2011 [1 favorite]

You get a good sense of how odds-setting and hedging works by watching the on-course bookies at a horse racing meeting. Punters are in search of the best odds on a particular horse, and bookies will try to attract bets in a distributed way: one may offer a better return on horse A, and a slightly worse one on horse B, while another may offer the reverse.

At the same time, they want to minimise potential losses, which means checking the odds offered by other bookies, adjusting them to reflect the market, and also placing bets with the on-course competition or with the Tote/parimuteul booth.

They've all got laptops now to work out what needs to be placed where in order to avoid a bad loss, which makes me think about how that used to be done with scratchpads, mental arithmetic and the instinct that comes from a ton of experience.

posted by holgate at 7:08 AM on August 1, 2011

At the same time, they want to minimise potential losses, which means checking the odds offered by other bookies, adjusting them to reflect the market, and also placing bets with the on-course competition or with the Tote/parimuteul booth.

They've all got laptops now to work out what needs to be placed where in order to avoid a bad loss, which makes me think about how that used to be done with scratchpads, mental arithmetic and the instinct that comes from a ton of experience.

posted by holgate at 7:08 AM on August 1, 2011

This is incorrect. If anyone did that, people would bet every cent they could on obvious favorites.

Floyd Mayweather Jr., who is fighting Victor Ortiz, opened as an 8:1 favorite based on oddsmakers' thoughts that he is by far the better boxer.

posted by ambient2 at 11:58 AM on August 1, 2011 [1 favorite]

I don't know for sure, but I do seem to recall reading (in *The Wisdom of Crowds* by Jason? Surowiecki) that the oddsmakers don't really care who wins (maybe at a personal level occasionally, but for the purposes of their job, no). They make money from the vig, and how they do that is have the line so that the people betting on either side balance each other out. Of course, I imagine that quite often, the oddsmakers themselves will agree with majority of the bettors, but that should be irrelevant. The exact mechanics of this I don't know about, but to answer your question, oddsmakers care about how people will bet, not what will actually happen. Now as it happens, the line does tend to correlate pretty well with how things actually turn out, as I recall, but that's a different story.

I don't know for sure what I'm saying, but I'm pretty sure that's what I read. You can look up the book if you want to know more.

posted by Busoni at 1:00 PM on August 1, 2011

I don't know for sure what I'm saying, but I'm pretty sure that's what I read. You can look up the book if you want to know more.

posted by Busoni at 1:00 PM on August 1, 2011

The other point to make (and I'm guilty of this as well in my comment) is that in contests where the betting is based on odds, they don't want equal money on both sides of the book, they just want the expected payouts to be the same. If a fight is going off at 8:1 you want 800 on the favorites side of the book and 100 on the underdogs side of the book.

When its a spread they want a balanced book.

posted by JPD at 1:09 PM on August 1, 2011

When its a spread they want a balanced book.

posted by JPD at 1:09 PM on August 1, 2011

This thread is closed to new comments.

The betting lines start as a guess and get validated by the masses. The house is incentivized to minimize payouts. They do that by offsetting each side of the bet against the other while making money off the rake in the middle. The closer they get to even odds (as determined by the masses) the higher their rake will be with respect to any discrepancy to one side or the other of the line.

The market forces this. Without it, there would be arbitrage opportunities, right?

Betting is different for horse racing than it is for boxing which is different from football... but I think the line creation is similarly dynamic and "even".

posted by milqman at 1:22 AM on August 1, 2011