h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Although that bit about where the bookmaker usually wins is funny, I think it should be noted that bookmakers don't really make their money from gamblers choosing poorly. Instead, they make their money from a "vig", short for "vigorish", also called "juice" or "overround". For instance, in the UK, when in a sporting event, two teams are estimated at an equal chance of winning, usually the bookmaker will offer 10/11 odds on them both. (In the U.S., I think it's more common that one pays even money while the other pays slightly worse. It's the same principle.) Of course, the true odds would be 1/1. The extra percentage the bookmaker gets is the vig, so the bookmaker wins money whichever team wins if roughly equal amounts were put into both teams. (The same situation is sometimes exploited by gamblers when rare situations called "arbitrages" occur, when two bookmakers offer odds that disagree and can be exploited.)

In other words, bookmakers win exactly the way casinos do: it's not that you're unlikely to win your bet, it just doesn't pay as much as it "should" when you do.

Yes, I know I'm being nitpicky and overanalyzing a joke.

- Kef

In the UK we call this an OverRound, or possibly, given that we're big business now, a 'profit margin'.

A simple way to calculate the profit margin from a set of prices expressed as fractions (2/9, 20/1, etc.) is to divide the bottom number by the sum of the top and bottom numbers. This will get you a value between 0 and 1. Add up these values for all of the runners in a race and you have a total that should be just above 1. The amount by which it is above 1 is the profit margin. Drop the 1, and multiply by 100 to get a percentage profit margin.

For instance, four runners, each runner priced at 5/2. 2/(5+2) = 2/7.
Four lots of 2/7 (0.285714) are 8/7, or 1.142857, representing a profit margin of 14.3%.

Of course, off-course bookmakers don't have the luxuty of adjusting their prices anywhere near fast enough to ensure a profit on every race, and the option that the customer has of taking SP or a board price also mucks up the equations.

As bookmakers embrace new technology, they get better feedback during the time leading up to a race which allows the bookmaker to adjust prices to better track the money riding on each selection.

It is also important to note that it doesn't matter one jot what the actual odds of winning are, because the prices being offered reflect the actual (or expected) balance of money riding on each of the selections. If ten people think that when I toss a coin that it will come up heads, and only two say tails, and each bet a pound on the outcome, I would be offering odds of 1/5 on heads, and 5/1 on tails, assuming I didn't want to make a profit. I'm more likely to offer 1/7 and 4/1 giving me a two pound profit on tails, and a lousy 57p on heads.

Jim