The Theory of Bookmaking »

by Charles Gillespie

By starting with a short background in the theory of bookmaking, you will better understand the concepts about value betting later on. We all know that bookmakers are sports experts and run highly efficient sports betting operations, particularly when it comes to pricing their odds and managing their risk. The traditional theory of bookmaking is all about risk management. In a theoretically ideal situation, bookmakers offer odds that insure themselves against all of the risk. They can accomplish this by running a fully “green” book. In this somewhat idealized scenario, the bookmaker offers odds that attract a balanced amount of betting on each outcome (bet) of an individual market (betting opportunity). While the amount of betting on each outcome may not be the same, the bookmaker’s risk for each outcome is balanced when you consider the payout rate (odds) for each outcome. In this balanced situation, the bookmaker would consider each of these outcomes as green, meaning that if any of these outcomes win, the bookmaker will turn a profit on this market. The opposite of a green outcome is of course a red outcome. Red indicates that the risk is not properly balanced and that if a red outcome wins, the bookmaker will pay out more money than it took in.

When running a fully green book, the bookmaker will offer payouts that are slightly less than the total amount of money that the bookmaker has received in bets. The gap between the take and the payout is called the overround (or vigorish in America). For example, if you bet your friend that the next flip of a coin will be heads, you will likely agree to odds of even money (or 2.00) given that it is a clear 50/50 proposition. Thus you would win whatever you risk plus the same amount, doubling your money. With a bookmaker, the same bet would be offered at less than even money. With odds of 1.95 on each outcome, the bookmaker can run a fully green book and guarantee a profit of 0.05 per coin flip.

This theory is somewhat idealized and bookmakers do not run fully green books in practice. Because of the betting patterns by the general public, it often makes sense to offer a red outcome. This is often the case with large favorites. Take for example a golf tournament with 100 players. The overwhelming majority of bettors are going to back Tiger Woods. If the bookmaker wanted the specific outcome for Tiger Woods to win the tournament to be green, they would have to offer very low odds to minimize their risk. In reality, the bookmakers will offer higher odds that provide a reasonable payout for a Tiger Woods win. This is to attract business and remain competitive.

Underdogs vs. favorites is one of the areas sharp sports bettors can exploit to identify valuable or profitable bets. We will explore all of these areas in the next section, Value Betting.

Republished with the permission of Original Post
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