" solidifying our position
as a leader in the field of sports gambling analysis. SportsInsights
focuses on systematic and measurable approaches to capturing value in the sports
marketplace. One of
SportsInsights' key elements to its approach is its proprietary Betting
Percentages, collected from several major online sportsbooks.
How does a business, and more specifically, a sportsbook -- view profit and
revenue? How do they manage risk? How do sportsbooks improve their profit
margins? How can "Betting Percentages" help? At SportsInsights, we often use
phrases like "betting percentages" and "smart money." With this article, the
first of a series, SportsInsights will be studying the workings of the sports
investing marketplace. In
this article, we take a step back and look at what an actual risk manager at a
sportsbook might feel. We'll
look at how sportsbooks make lines for games, study how they might shade lines
to increase profit margins, and see how public "betting percentages" can help
identify value.
In future articles within this series, we'll take a closer look at why "smart
money" and "reverse line movement" are telling indicators -- and how they work
on a more fundamental level. These articles can help us get a better
understanding of why "contrarian investing" works -- and how sportsbooks
operate. The information on this site is for entertainment and
educational purposes only. Use of this information in violation of any federal,
state, or local laws is prohibited.
Sportsbooks and
Balancing Risk
For point-spread sports, the odds are generally around -105 or -110. For
instance, you might be able to bet on the favorite in the NFL such as the New
Orleans Saints at -10 at -110 odds, or the favorite in an NBA game such as the
Boston Celtics -3 at -105 odds. If you wanted the other side of the bet, you
could normally take the underdog for the same point-spread (+10 and +3,
respectively), and "receive" the points, instead of "giving" the points. The
odds are typically close to even odds, such as -105 or -110 (which means risking
$105, or $110, to win $100). Point-spreads -- and moneyline odds -- are designed
to help sportsbooks
balance the risk they have on either side of a bet.
Sportsbook Payouts and
the 50%/50% Betting Percentage or "Balanced Book"
In this example, a casino or sportsbook has taken in 100 bets of $110 each ($110
to win $100), or a total of $11,000. Fifty percent (50%) of the bets (or 50
bets of $110 each, totaling $5,500) are on the favorite and 50% of the bets are
on the underdog.
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The sportsbook knows that if the Favorite wins, they have to pay out $10,500
to the appropriate bettors ($5,500 bet plus $5,000 winnings).
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Similarly, if the Underdog wins, the sportsbook also has to pay out $10,500
-- to the appropriate bettors.
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The sportsbook is happy because either way, they have profited -- since they
collected $11,000 in total and need to pay out just $10,500.
This is fairly ideal for the sportsbook's risk manager. The bets are evenly
balanced so the sportsbook collects the vig with no risk. The sportsbook will
collect $500 on $11,000 worth of action, for a profit
margin of 4.5%. The sportsbook has a nicely balanced book of business.
Sportsbook Payouts and
the "Centered Game"
In addition to trying to balance bettors on either side of a bet, sportsbooks
seek to price the odds of each bet so that each sporting event is close to a "centered
game," or a bet whose pricing reflects the actual expected probability of that
event to occur. If the bets
are priced with the true exact probabilities, bettors will only be able to win
50% of their point-spread bets (and appropriate moneyline winning percentage) --
and the sportsbooks will collect the 4.5% profit margin in the long run due to
the cushion of the vig. In this example, the actual bets that a sportsbook takes
won't matter in the long-run (because by definition, the proper pricing will
prevent bettors from making outsized gains).
Human Nature, Profit
Margins, and Shaded Lines
In the examples above, we show perfect scenarios for the sportsbooks. In
real-life, it is difficult for the sportsbooks to perfectly balance the risk on
every single bet they take. In addition, it is impossible to know the precise
odds of any sporting event to perfectly "center the odds."
However, there is one sure thing that rings true: human nature. Bettors have
certain tendencies. For instance, on average, bettors like to take favorites.
Sports fans also like "jumping on the bandwagon" and riding the coattails of
perennial winners. Sportsbooks
can use these biases to shade their lines and increase their profit margins.
We estimated a sportsbook's expected profit margin based on results over a wide
range of events (small favorites, heavy favorites, etc.). We analyzed the
expected profit margin when shading a team's expected probability for covering
the spread by 1%, 2%, and 3%. Note how the left column, "Public % on Overpriced
Side," affects the overall profits, when shaded by the different percentages.
For the purposes of this table, we assumed all bets are the same size.
Table 1: Expected Profit Margin for Shaded Lines
based on Betting Percentages
As you can see in Table 1, above, there is a strong incentive for sportsbooks to
shade lines, based on their experience with bettors and human nature. For
example, we know that many bettors prefer to bet on favorites. Based
on our analysis, if 60-80% of bets are taking the favorite, sportsbooks can
improve their profit margins from 4.5% to about 6% by shading their lines 2%! Most
games do not get out of whack in terms of public "betting percentages" to
0%/100% -- especially in the opposite direction that sportsbooks expect, so
there is virtually
no risk for the sportsbooks to shade their lines.
And How Can Betting
Percentages Help?
Based on research for this article, we can see that when the public "betting
percentages" get to extremes, it identifies games that sportsbooks have
potentially shaded. For example, the Lakers might be favored by -12 points
instead of the -10 that the "centered numbers" dictate. The sportsbooks know
that the betting public will lean to the popular teams and heavy favorites. They
will make the "Joe Public" "pay more" to take the heavy favorites.