Have you seen a bookie out of pocket? It is doubtful, they are very smart and the odds are normally stacked against the average punter. Scottish economist John Law, who was born in 1671 and is remembered for setting up France’s first central bank and producing financial theories featuring key conceptual points which are still used today, actually loved a gamble. Like many people who work and worked in that business, he was fond of a bet and one of his favourite plays was to offer odds of 10,000/1 that anyone could throw six consecutive sixes with a die.
It was bad value, the correct odds are over 46,000/1, so Law was never likely to pay-out. This tale works as one of the first examples of a ‘house edge’, the difference between the real odds and those offered to the punter. For example, the odds against any single number coming up on a roulette wheel is 36/1. But live and online casinos pay you 35/1 which gives them a 2.7 percent margin.
Risk and Reward
All companies which offer gambling constantly aim to balance risk with what customers deem to be attractive odds. It is a simple strategy, casinos have a house edge and bookmakers have an over-round. Both are designed to give them a margin that will guarantee a profit but also ensure that their punters win back a big enough share of gambled money and keep coming back.
An over-round, that’s the percentage points over 100 works like this: A bookie offers punters bets on the toss of a coin. The odds on either outcome are even-money, 50 percent and 50 percent. But offering even-money is pure gambling, as the odds fairly reflect the probability of either outcome. Bookies cannot make money at those odds, so they will offer something like 10/11 on both results.
This means punters will have to stake £/€11 in order to win £/€10 on either a head or a tail. Consequently if a bookmaker takes in £/€22 (£/€11 on either outcome) in bets and pays out £/€21 (the £/€11 stake plus £/€10 in winnings) to the winners, they will keep £/€1 profit for themselves. In this instance the bookie’s odds come to 104.8 percent. That is 52.4 percent plus 52.4 percent, giving the bookmaker or online sportsbook of 2.4 percent on each result. The 4.8 percent is the over-round so in theory for every £/€104.80 gambled they will pay out £/€100 and retain £/€4.80 in profit.
The house edge or over-rounds ensure that the returns are a few percent below the real risk. This means that as all eventualities play out, punters will ultimately lose slightly more than they win. But things are not as simple as that. Customers know when they are not getting decent odds and they will often take their business elsewhere – if that is where the best odds can be found.
As a result bookmakers have to offer proportionately better odds on favourites and the fancied horses that people want to back. This means even if a bookmaker’s margin on a race averages 2 percent per-runner (a 120 percent book on a ten-runner race), it is likely to be 1.5 percent on the popular runners. Normally just a few horses at the top of the betting generate the bulk of the betting handle on all races.
Setting the Prices
Firms such as BoyleSports employ odds compilers to work out their initial prices which they will offer on the following day’s sporting events. Once these markets go live the prices will then be adjusted according to the weight of money on teams, horses, individuals, greyhounds etc. Put simply, if something attracts lots of money they will shorten its odds.
So can you beat the bookies? Seasoned gamblers have realised one of the best tools in their armoury in this battle is focusing on ‘value’ – in other words shopping around for the best price. Thereafter deciding if the odds on offer outweigh the likelihood of victory is a matter of good judgement and disciplined wagering.
The Blackjack Under-Round
In the casino space another mathematician, Edward O Thorp, a teacher at the University of California, Los Angeles, during the 1960s, discovered something about blackjack that reversed gambling’s laws. The house edge in popular ’21 game’ is 5 percent, but Thorp found that when the deck from which the casino’s croupier is dealing contains a large number of high-value cards, the odds swing significantly in the players’ favour.
A Killing and a Nomadic End
Thorp’s system of tracking or ‘card counting’ was a game changer. The casinos initially laughed at him but they banned him when it became clear his calculations were right. Thorp would move on to the biggest casino of all, global financial markets, where he started one of the first hedge funds and made a killing. John Law was not so lucky. He took over France’s financial system in 1718. To raise money he started the Mississippi Trading Company and sold shares, inflating a huge investment bubble. It collapsed, taking the country’s economy with it. Law, who lost his property portfolio of 21 châteaux and a palace in central Paris, when leaving France in a hurry spent his final years gambling in Rome, Copenhagen and Venice.