On one level it may seem a very simple, almost stupid question, to ask how bookies set their odds. If Novak Djokovic is playing Norbert Nobody, or Liverpool are playing Grimsby Town, we just *know* who the favourite is and almost subconsciously would have some idea of what the odds would be. However, bookies are risking huge sums of money by taking bets and they would rather have slightly more than “some idea” of what the prices ought to be. In addition, they are often dealing with far more complex markets than simple head-to-head match odds between two opponents.

In this article, we will look at the notion of the true odds and implied probability, the bookmaker’s margin and how the oddsmakers go about trying to gauge a selection’s chances of occurring. We will also look at the impact of the market, as well as the concept of steamers and drifters.

## True Odds, Actual Odds & the Bookie’s Margin

The first thing we should be aware of is that the bookmaker’s odds are not a direct reflection of the probability of a given event happening. The simplest way to show this is by using a market we would *never* recommend betting on, the coin toss in cricket. This is a market on which side will win the toss at the start of a game and, being based on the standard toss of a coin, it is a market where the two captains and sides both have identical 50% chances of success.

No matter how many tosses one side has won or lost in a row, that 50/50 probability remains. Incredibly, back in 2016, the home sides won 14 tosses in a row in Test matches in Asia (a one in 16,384 chance): no matter, the probability of the hosts winning the next toss remains 50%.

So, given this indisputable fact, if the odds directly reflected the chances of either captain winning, they would be even money. Bet £10 on the home skipper and £10 on the tourists and either way you, and the bookie, would break even. However, bookies can’t afford to pay the advertising salaries of “ambassadors” like Jose Mourinho, Ray Winstone or Peter Crouch by breaking even and so rather than price this market at evens, they offer shorter odds.

The price will vary from site to site but 10/11 is not uncommon, though some bookmakers might drop as short as 4/5. Based on odds of 10/11 the bookie has created a margin for themselves that means that if £10 was staked on both sides they are guaranteed to be up.

### Implied Probability

We calculate the overround, a term often used interchangeably with others like the bookie cut, house edge, take or vig (short for vigorish), by calculating the implied probability of the odds. This is the probability of an event happening we can infer from the odds, assuming there was actually no house edge.

There are calculators to work out the implied probability available but the equation is very simple. Just take the odds in decimal format and divide one by them. So, 10/11 is 1.91 (some figures can vary from site to site depending on rounding procedures) and so: 1 ÷ 1.91 = 52.4%. Again, this may vary according to how different sites do their rounding. When we combine all the implied probabilities of the selections within a market, the total will be 100% if there is no bookie edge.

We see this with our coin toss if the odds were evens on both skippers because evens is 2.0 in decimal and one divided by two is 0.5 (50%) and 50% plus 50% gives us a perfect, “fair” book of 100%. Based on odds of 10/11 we have a book of 104.71% (not simply 52.4% + 52.4% as we have rounded to two decimal places on the total, not the component elements), which give an overround, or margin, of 4.71%. Drop those odds to 4/5 and that margin increases to 11.11%.

### What Margins Do Bookies Take?

One of the factors, but far from the only one, that makes a betting site great is the odds. In general, the top bookies offer bigger prices but the margin they take on a market depends on many factors. When they have more faith in the accuracy of their odds, margins are typically lower. In addition, they tend to be reduced for the most popular sports and bets, because this is where the most money is wagered and so they compete with each other for a slice of the biggest pie far more than they do on a market where they have much less to gain.

All of this means that the margin varies from site to site and market to market (even within the same sports betting site). What’s more, although this is harder to discern, bookmakers also tend to offer better value odds with a smaller margin on selections at the top of the betting. We have discussed the margin in terms of the overall market but the burden of the overround is not necessarily shared equally by all of the possible winners.

The oddsmakers tend to try and take a larger cut on outsiders for three main reasons. First, once again, this is where the bulk of the money is being wagered and if their odds are poor, their competitor will cash in. Second, typically punters betting on picks at long odds are less conscious of the price and if they are happy to back a horse at 50/1, they are probably not that bothered if they only get 40/1. Last of all, various psychological studies have shown that our ability to calculate probabilities is far more limited when it comes to bigger numbers.

Put two boxers in the ring and we can understand relatively easily that one is slightly better than the other, so maybe has a 55% chance of success compared to 45% for their opponent. We can also comprehend without too much difficulty how this might translate into odds. However, if we have a horse race with 16 runners and several are priced between 20/1 and 100/1, it is far trickier to understand. Does a 50/1 shot have a 1.94% chance of winning (making it bad value) or a 2.4% chance, making it good value?

## How Do the Bookies Calculate the Odds?

In very fundamental terms, the bookie decides what margin they want and what chance the selections have of winning, and then adds the margin, subject to some tweaks, to each runner or team’s true chance of winning. And, just like that, we have the odds!

However, whilst we have discussed what might affect the margin each site takes, how do they arrive at their assessment of each of the participants and their probability of success? There are many who believe that in the modern era fewer and fewer UK bookies actually have fully functioning trading departments that set their own odds. At least not in the traditional sense of trying to analyse the true probabilities.

### Are They Copycats?

Instead, it is believed that more often than not, for the majority of events, they simply follow a select number of Asian bookmakers, broadly keeping their prices in line with these. They will adjust according to their desired margins and as the market evolves but in general they are not proactively setting prices based on their own research into the event.

However, whilst this may well be true, *someone* is setting the odds, be that the bookie you decide to make your bet with in the UK or the site they “copied” to come up with their prices. So, how do *they* decide that Man United should be 6/5 and not evens, or that a horse should be 6/1 rather than 12/1?

### Data & Analysis

Ultimately, as with so many things in modern life, and in particular sport, it largely comes down to data and analysis. Even for relatively obscure sports and events there may be masses and masses of statistical information. Using this, alongside more qualitative inputs such as expert opinion and experience, as well as great computational power, oddsmakers are able to come up with their predictions.

They will be looking at all of the things any shrewd assessor of value bets will be doing. This includes a massive range of factors, some of which may be sport-specific ones. Current form, long-term form, home or away advantage, injuries, course form, the weather, changes in backroom staff (be that the manager of a football team or the trainer of a horse), confidence, morale, preparation, reports on how training has been and more besides are all plugged into the analysis to hopefully spit out a probability that is as close as possible to the true likelihood of given eventuality.

## Bookie Has Margin of Error

Of course, whilst the people setting the odds have all sorts of expertise, technology and know-how at their disposal, accurately assessing the chances of almost any future event is a fiendishly difficult task. But the bookies have two huge factors in their favour that mean they do not need to get things absolutely spot on.

### The Overrround

First, as we have seen, they have the overround. Should their assessment prove wrong, they have an in-built margin of error that gives them a buffer. They could get their prices wrong quite substantially and still make money, or at the worst make a small loss. Over time, their margin, and their vast resources in working out what the true odds are, means they are almost certain to win.

### Odds Are Not Fixed

Second, the odds are not fixed. If the bookies had to come up with a price and then accept bets at those odds until the game, race or tournament began, their life would be a whole lot harder. However, that is not the case and the odds are fluid. If the wisdom of the crowd, by which we mean the masses of punters betting on an event – in other words, the market – decide that a bookie has their odds wrong, they will back any overpriced selection.

As a reaction to this, bookies will then reduce their odds, often very quickly before too much money is wagered. In doing this they shape the market and at the same time correct any pricing errors. As one selection gets backed its odds will fall and the price on the other participants will rise.

Now the other contenders represent greater value and so more money will be wagered on them and less, in theory at least, on the selection that began at odds that may have been too big. This mechanism, in conjunction with the overround, means that sadly for us punters, the house very rarely loses.

## Market Isn’t Always Right

We mentioned the wisdom of crowds earlier but there are times when the crowd is unquestionably wrong. One obvious example is when it comes to the England men’s football team (and to a lesser extent other England teams too). The UK is one of, if not the biggest, fully regulated betting markets in the world and football is both the most popular sport and the one that is bet on the most.

Whenever the World Cup or European Championships come round, there is a huge amount of money bet on the Three Lions in the outright tournament winner market. The vast majority of that comes from punters betting due to patriotism and blind hope that England can finally end their *x* years of hurt, as opposed to any cold-headed analysis of the stats.

### Reduce Odds on Major Events

This means two things: first, the bookies have to reduce their odds to limit their liability on what would be a huge payout if England somehow managed to actually win something. Second, they know they can get away with lower odds because your mate Dave in the pub who swears “It’s our year” doesn’t really care about the value and would probably back England at 2/1, let alone the 8/1 he can get or the 20/1 that might well be the fair odds!

Another good example of the market shifting the odds for no objectively valid reason is the last race of Frankie Dettori’s famous Magnificent Seven at Ascot. The Italian won all seven races on the card, landing an incredible acca of 25,091/1, with one punter scooping £550,000 on the feat.

In the last race Dettori’s ride, Fujiyama Crest, was backed in from 12/1 to just 2/1. Some drop in odds was justified, as the jockey and yard were clearly in fine fettle and Dettori’s confidence would have been sky high. However, the primary reason for this massive steamer (see below) was that bookies up and down the country were trying to reduce their liabilities.

### Unusual Wins

As Frankie landed winner after winner more and more punters began backing his horses, including in various accas, the bookies were facing a catastrophic loss if he won in the last race. The weight of genuine punter cash forced the odds lower but so did the bets of bookies as they tried to force the Starting Price lower and also cover some of their potential losses, placing huge bets with anyone who would accept them.

Both of these things (England in football and the Magnificent Seven) are just two examples of how the market and the odds can sometimes appear to defy all logic. They are not based on stats, data or analysis but are affected by what we could call psychological factors.

## What Are Steamers & Drifters?

Betting is awash with terminology, much of which has bled into mainstream usage, with phrases such as “odds-on favourite”, “neck and neck” and “upping the ante” often now detached from their original meaning. If you are familiar with betting you may have come across the terms steamers and drifters but these are not as commonplace as some of the other idioms we have mentioned and you may not know what they mean.

### Steamer: Odds Get Shorter

Both refer to the changing odds of a certain selection within a betting market and they are, in fact, the opposite of each other. If we refer to a horse as a steamer, we mean that its odds are getting shorter and shorter. In contrast, the price of a drifter is getting longer.

Whatever sport you are betting on, the odds of the various selections are likely to be changing all the time. Usually these are minor movements, largely driven by bets coming in and the odds will to and fro, occasionally getting larger and sometimes smaller. However, should the odds move dramatically and consistently, there is usually something more going on.

Horse racing pundits in particular may highlight steamers because often when the odds on a horse shorten significantly it is because those in the know – connections of the horse – have placed substantial bets on it winning. Betting is intrinsically linked to horse racing and whilst there are strict restrictions on jockeys wagering on themselves (or against their mounts), owners, trainers and those otherwise connected to the horse and stables are free to bet as they want.

### Drifter: Odds Get Longer

They are obviously best placed to know exactly what sort of form, shape and mood a horse is in and why it might have run badly in previous contests. If it finished last in its first race over six furlongs on soft ground, it might be priced as a 40/1 outsider for its second contest, five furlongs on good to firm. However, connections may be certain this represents incredible value if they know that it is really a minimum-distance horse and hates much give in the turf.

On the morning of the race, the owner in particular, and to a less extent the trainer and other staff, may start placing a number of big bets on the horse. This will see bookies begin to cotton on and cut the odds but this can sometimes simply start a chain reaction. When punters see such a horse beginning to shorten, they start to think there might be a good reason for this and so they back it too, further driving down the price and so it goes on.

The big issue for punters is that whilst the horse may have been brilliant value at 40/1, 33/1, 20/1 and maybe even 16/1, is it necessarily value at 12/1, 10/1 or even shorter. What’s more, even a good value 10/1 shot will lose a lot of the time, so following steamers is far from a sure-fire route to gambling success.

It should be noted that there are other reasons for selections, be they horses, football teams or anything else, seeing their odds drop dramatically. The same applies for drifters – picks where the odds suddenly get much larger. Perhaps this is down to team news with a football bet, rumours of an injury (applicable to most sports), reports of unrest behind the scenes or even simply because there has been a steamer elsewhere in the market, for this will see all the other options drift at least a little.

### Conclusion

To summarise very briefly (and we do mean *very*!) what we have discussed about how bookies set their odds we can say the following:

- Bookies offer odds lower than the true probability of an event would imply to give themselves a margin.
- This margin varies from one bookie to another, from one market to another and even between different picks in the same market.
- To calculate the odds the bookie needs to first decide what they think the true probability is.
- Many major UK books now follow the lead of major Asian bookies rather than proactively calculate or set their own odds.
- Sites that do try and work out the correct odds use a wealth of stats, data, news, experience, know-how and computing power to try and factor in every single thing that might affect the result.
- It is not an exact science and sport is unpredictable, so errors happen.
- Sometimes the market acts illogically, swayed by blind faith or patriotism, for example.
- Prices are typically in a state of flux but major movements up (drifters) or down (steamers) may be due to large bets being placed or new information coming to light.
- The fact the bookies have a sizeable margin factored into the prices and can alter their odds as the market develops tends to protect them from major losses.