Lesson 1 - Overround

In my first lesson in betting using a model, I'm going to explain some of the mechanics of how a bookmaker makes money. I talk about the "overround" quite a lot in my posts so I will explain this in a bit of detail.

What is Overround?
Overround is essentially how a bookmaker makes money. A bigger overround means more money for a bookmaker, and conversely less money for the punters. Overround is represented by a % number.

So how do you calculate your overround?

Liverpool @ 1.36
Draw @ 5.5
West Ham @ 9

First take your odds above, and convert these into percentages. for example, to convert home win, (1/1.36) = 73.5%

Liverpool 73.5%
Draw 18.2%
West Ham 11.1%

Then add these up. These three percentages add to 102.8%. Why is this important? It means your bookmaker is taking a 2.8% margin on whatever bets are placed (in theory). With a perfectly balanced book, he will make a 2.8% profit.

For example, lets assume those odds are a true reflection of the publics perception of the actual odds of the game. The bookmaker receives £7,352.94 in bets on Liverpool, £1,818.18 in bets on the draw, and £1111.11 in bets on West Ham. The bookmaker has then received £10,282.23 in bets, and will pay out £10,000 no matter who wins. Therefore, the bookmaker is completely neutral to the result and will make a profit of £282.23 irrespective of the winner.

Of course, this is in a perfect world and it doesn't always work out like that. People lump a lot of money on the favourite, teams that are well backed, for example Liverpool, will get bets placed on them no matter what the odds are. It is this irrational behaviour which makes it rational for a bookmaker to price up not based on his beliefs, but on his beliefs of the public's beliefs. This weekend it allows the bookmaker to price up Liverpool to win at 73% chance, when a basic model will tell you their chance is closer to 57%.

In any case, overround is quite important. Here is the overround for a couple of bets from the first game of the season, Manchester United vs Tottenham:

Home-Draw-Away: 102.3%
Over-Under: 105.6%

So what does this mean? It means a home/draw/away bet is the best bet to place for someone betting using a football model. It gives the bookmaker the smallest advantage possible (a perfectly fair game would have an overround of exactly 100%) and means that when we are working with small margins, even if the results we are picking are random, our expected profit is only a 2.3% loss.

So what about other markets?

Double Chance: 106.1%
Both Teams to Score: 108.5%
Goals odd/even: 103.9%
Draw No Bet: 106.7%
Result/Both Teams to Score: 114.6%
Score bet (eg 1-1): 122.6%

What this demonstrates is that generally, the more bets you can place, the higher the typical overround. In a way, overround is similar to the bid/ask spread of a typical financial market. You want this number to be as small as possible. If you plan on betting properly, you need to test the markets you are going to bet on to make sure that your overround is as small as possible - bigger overrounds will erode your profits and make gambling unprofitable in the long run.