Cracking the code: Odds in Wagering industry

What are Odds?

Odds are a way to represent the likelihood of a particular outcome in a sporting event or race. They also indicate your potential payout if your bet is successful. 

Types of Odds

In horse racing, odds are typically presented in two formats: fractional and decimal.

• Fractional odds: Represented as a fraction, such as 2/1 or 5/2, i.e., potential profit you could make as a fraction of your investment. For example, with odds of 2/1, if you bet $1, you could potentially win $2 in profit, plus your original $1 bet back, for a total of $3 returned to you.
• Decimal odds: Represented as a decimal number, such as 3.00 or 2.50. This number includes your original stake in the calculation, so if you bet $1 at odds of 3.00, you would receive $3 if your bet is successful ($2 profit plus your $1 stake).

In sports betting, odds are usually displayed in decimal format, though fractional odds are also used in some regions. Other than this, Moneyline/American Odds are commonly used in the United States.

• Moneyline/American odds: Commonly used in the United States, moneyline odds are represented with a plus (+) or minus (-) sign followed by a number, representing how much you need to bet to win $100. For example, if the odds are -150, you must bet $150 to win $100. A plus sign indicates the underdog; the number represents how much you would win if you bet $100. For example, if the odds are +200, you would win $200 if you bet $100.

Consider a soccer match, with three possible outcomes – Team A/B winning or a draw. The three odds can be represented in the following way.

How to interpret Odds?

Odds typically represent the implied probability of an event happening, which is calculated by dividing 1 by the odds (in decimal format) and multiplying by 100 to get a percentage. For example, for decimal odds 3.00, the implied probability is 1/3.00 * 100 = 33.33%. This means the bookmaker believes there is a 33.33% chance of the event happening.

Note: Higher the Odds, lesser the probability of the underlying outcome.

How are odds calculated?

Calculation of odds is usually a multi-step process.

1. Collection of past data on the similar event(s).
2. Based on past data, the probability of the event is calculated using a suitable predictive model.
3. (Manual)Adjustment to the probability(output of step 2) for external factors like public opinion, current player/team conditions, etc.
4. Adjustment for bookmaker margin.

Odds may not always be FAIR

Although the calculations above can help you interpret odds, for all practical purposes, we need to understand that the odds presented on the bookmaker sites/applications are not always accurate or fair.

It’s important to note that bookmakers set odds based on various factors, including the likelihood of an outcome, public perception, and their desired profit margin. As such, they are not always an accurate reflection of the actual probability of an event occurring.

Hence, the odds you get from the bookmakers are usually not a direct consequence of a pre-defined predictive model, but are adjusted for the:

• External Factors, like expert opinions, and public perception: For example, if a key player gets injured just before the match, the probability of the team winning decreases.
• Bookmaker margin: The bookmakers include a margin in their odds , guaranteeing them a profit in most bets. 

You may find different odds for the same event with different bookmakers for these reasons. Even with this, Fixed odds betting markets are relatively more efficient, meaning that prices reflect the true probability of an outcome to the best of the bookmaker’s knowledge. This makes it challenging for bettors to beat the market consistently.

Overall, odds are a crucial component of the wagering industry, providing a framework for bettors to assess risk and potential return, guiding betting decisions, and enabling bookmakers to manage risk and generate revenue.