Welp MagazineWhen your business model includes welcoming an almost uncapped amount of risk, the dangers to your future success require no explanation. And yet, sportsbooks continue to make huge amounts of money, despite the fact that bettors have carte blanche to wager on pretty much anything they want and when they want.
The mechanisms their traders and number-crunchers put into place ensure that losses can be kept to a minimum, with the process of ‘laying’ bets to balance the books a practice that’s more than a century old in the sector.
Let’s take a look at an example using some of the latest match-winner NHL betting odds: we can wager on Toronto Maple Leafs at odds of -175, or instead take a chance on the underdogs Montreal Canadiens at +145. As we know, these prices represent the percentage chance of either team winning, and yet when we add them together the total percentage available is 104.47%. This means that the bookmaker has included an overround – sometimes known as vigorish or ‘vig’ in the industry – of 4.47%, which is essentially their profit margin on the match.
Bettors aren’t overly concerned; they will often take the odds available at their favorite sportsbook with no questions asked, and the bookie themselves can limit their liability by building a safety net into their prices. The leading sportsbooks also employ odds-compilers, and while these individuals tend to be sports fans, they aren’t setting prices based on their own instincts, rather they use advanced mathematical modeling to ensure that their odds represent the actual likelihood of a scenario happening.
So essentially what you have is some of the sharpest minds around using the best tools in order to price a betting market just right. That, allied to the use of the overround principle, ensures they can remain profitable even when a heavily-backed favorite goes on to win their hockey game or whatever it might be.
This model is a lesson to businesses in all sectors. You can’t only welcome risk but profit from it if you are smart, and so it’s very much worth employing risk management specialists, be it in-house or outsourced to a professional, that can turn a potential negative into a positive for your company.
Balancing the Books
Balancing the books- it’s kind of a throwaway term used in business management.
Yet for a sports betting operator, another method that is utilized to manage risk is, quite literally, to balance the book of each sporting event that they offer odds for. Their ultimate goal is to profit with the same amount no matter which of the outcomes occurs so that, in the end, they have no concerns whether it’s the Maple Leafs or the Canadiens that wins the game.
This is made possible by spreading risk, with many sportsbooks laying bets at ‘soft’ bookmakers or betting exchanges, their profit then lies in the gap between the odds they are offering and the price they have accessed from this more generous third party. If a sudden weight of money is wagered on the Maple Leafs, the danger is that their book will become imbalanced. Consequently, they will shorten the odds on the favorite while laying them at another bookie too.
It’s not always possible for a sportsbook to balance their position when market sentiment quickly shifts in one direction or another, and there are times that the bookies have taken a loss through their willingness to accept risk, the first fight between Mike Tyson and Evander Holyfield in 1996 being one such example. However, in the long run, every firm that has taken a big hit on an individual sporting event will recoup those losses by sticking to their guns and a business model that is provably equitable.
In summary, the way that sportsbooks mitigate their risk is a lesson that can be learned from and utilized by businesses in a wide range of sectors. Success can be earned by accepting risk but acknowledging that, in the long term, your firm can be profitable if it sticks to its model of best practice, despite the variance that can test the nerve of even the steeliest of CEOs or CFOs.
