The last thing bookmakers want to do when setting odds is to gamble on one outcome over the other. Odds are set in a way that they reduce variance and ensure a profit while still reflecting the real probability of an event happening. This is a great balance of making a profit and ensuring punters are attracted to bet on the outcome of the event.
Bookmakers start by setting their margin, this is usually around the 5% mark, and they set the odds for the various outcomes integrating this commission. As of today, most bookmakers use betting providers to set their odds. The margin built is into a bet is referred to as the Vig or Overround. The betting company calculate the probability of an outcome occurring and then subtract their margin. If the real probability is 2/1, the bookie will subtract their 5% commission, and then the real odds given will be as 19/10.
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The more data that is available to these providers, the more likely the bookmaker odds will reflect the real probability on the event, if the event has never happened before or there is little to no data on the outcomes, then the bookmakers will be more cautious, and the odds will be lower than the real probability. For example, football odds, overall, tend to be good value as there is a lot of data available. However, odds on say the winner of the X-factor is far less certain and so will have higher margins built-in, therefore giving overall worse value for the punter. The best way to understand bookmakers odds pricing is to think of an event with two possible outcomes. We want to bet on which side will kick off a football match; this is the same as the odds on the flip of a coin, and so has a 50/50 chance of happening. The naïve bettors may think that the odds will be even for each outcome, but they never will be; this is where bookmakers build their profit margin.
In this case, let us say the bookie is giving odds of 10/11 on each team to kick off. If we were to place a £100 on each team to win the kick-off, it would cost us £200; the maximum return, however, is £191 (£100 stake + £91 winnings). The margin, therefore, is 200-191 = 4.5%; if the book is balanced (equal amount wagered on each team to kick-off), then the bookmakers is guaranteed to make £9 for every £200 wagered.
Probability is only one aspect of odds pricing. Bookmakers do not set their odds entirely based on the probabilities but rather on how likely they think bettors will wager on each outcome, allowing them to balance the book. Head to head markets on significant sports tend to have the lowest margins, usually between 2-5%; this can go up to 20% or more if betting on more exotic lines or markets.
