SportsInsights.com Article -- Sportsbook Profit Margins and Betting Percentages -- May 2010

SportsInsights is a leader in providing innovative sports information and betting systems to help its members navigate the sports marketplace.  SportsInsights' founder, Dan Fabrizio recently came out with a book on " Sports Investing: Profiting from Point Spreads," solidifying our position as a leader in the field of sports gambling analysis. SportsInsights focuses on systematic and measurable approaches to capturing value in the sports marketplace.  One of SportsInsights' key elements to its approach is its proprietary Betting Percentages, collected from several major online sportsbooks.  

How does a business, and more specifically, a sportsbook -- view profit and revenue? How do they manage risk? How do sportsbooks improve their profit margins? How can "Betting Percentages" help? At SportsInsights, we often use phrases like "betting percentages" and "smart money." With this article, the first of a series, SportsInsights will be studying the workings of the sports investing marketplace. In this article, we take a step back and look at what an actual risk manager at a sportsbook might feel. We'll look at how sportsbooks make lines for games, study how they might shade lines to increase profit margins, and see how public "betting percentages" can help identify value.

In future articles within this series, we'll take a closer look at why "smart money" and "reverse line movement" are telling indicators -- and how they work on a more fundamental level.  These articles can help us get a better understanding of why "contrarian investing" works -- and how sportsbooks operate.  The information on this site is for entertainment and educational purposes only. Use of this information in violation of any federal, state, or local laws is prohibited.

Sportsbooks and Balancing Risk

For point-spread sports, the odds are generally around -105 or -110. For instance, you might be able to bet on the favorite in the NFL such as the New Orleans Saints at -10 at -110 odds, or the favorite in an NBA game such as the Boston Celtics -3 at -105 odds. If you wanted the other side of the bet, you could normally take the underdog for the same point-spread (+10 and +3, respectively), and "receive" the points, instead of "giving" the points.  The odds are typically close to even odds, such as -105 or -110 (which means risking $105, or $110, to win $100). Point-spreads -- and moneyline odds -- are designed to help sportsbooks balance the risk they have on either side of a bet.  

Sportsbook Payouts and the 50%/50% Betting Percentage or "Balanced Book"

In this example, a casino or sportsbook has taken in 100 bets of $110 each ($110 to win $100), or a total of $11,000.  Fifty percent (50%) of the bets (or 50 bets of $110 each, totaling $5,500) are on the favorite and 50% of the bets are on the underdog. 

• The sportsbook knows that if the Favorite wins, they have to pay out $10,500 to the appropriate bettors ($5,500 bet plus $5,000 winnings). 

• Similarly, if the Underdog wins, the sportsbook also has to pay out $10,500 -- to the appropriate bettors.   

• The sportsbook is happy because either way, they have profited -- since they collected $11,000 in total and need to pay out just $10,500.  

This is fairly ideal for the sportsbook's risk manager.  The bets are evenly balanced so the sportsbook collects the vig with no risk.  The sportsbook will collect $500 on $11,000 worth of action, for a profit margin of 4.5%. The sportsbook has a nicely balanced book of business. 

Sportsbook Payouts and the "Centered Game"

In addition to trying to balance bettors on either side of a bet, sportsbooks seek to price the odds of each bet so that each sporting event is close to a "centered game," or a bet whose pricing reflects the actual expected probability of that event to occur. If the bets are priced with the true exact probabilities, bettors will only be able to win 50% of their point-spread bets (and appropriate moneyline winning percentage) -- and the sportsbooks will collect the 4.5% profit margin in the long run due to the cushion of the vig. In this example, the actual bets that a sportsbook takes won't matter in the long-run (because by definition, the proper pricing will prevent bettors from making outsized gains). 

Human Nature, Profit Margins, and Shaded Lines

In the examples above, we show perfect scenarios for the sportsbooks. In real-life, it is difficult for the sportsbooks to perfectly balance the risk on every single bet they take. In addition, it is impossible to know the precise odds of any sporting event to perfectly "center the odds." 

However, there is one sure thing that rings true: human nature.  Bettors have certain tendencies. For instance, on average, bettors like to take favorites. Sports fans also like "jumping on the bandwagon" and riding the coattails of perennial winners. Sportsbooks can use these biases to shade their lines and increase their profit margins. 

We estimated a sportsbook's expected profit margin based on results over a wide range of events (small favorites, heavy favorites, etc.). We analyzed the expected profit margin when shading a team's expected probability for covering the spread by 1%, 2%, and 3%. Note how the left column, "Public % on Overpriced Side," affects the overall profits, when shaded by the different percentages. For the purposes of this table, we assumed all bets are the same size.  

Table 1: Expected Profit Margin for Shaded Lines based on Betting Percentages

What do the Results Mean? 

As you can see in Table 1, above, there is a strong incentive for sportsbooks to shade lines, based on their experience with bettors and human nature.  For example, we know that many bettors prefer to bet on favorites. Based on our analysis, if 60-80% of bets are taking the favorite, sportsbooks can improve their profit margins from 4.5% to about 6% by shading their lines 2%!  Most games do not get out of whack in terms of public "betting percentages" to 0%/100% -- especially in the opposite direction that sportsbooks expect, so there is virtually no risk for the sportsbooks to shade their lines.  

And How Can Betting Percentages Help?

Based on research for this article, we can see that when the public "betting percentages" get to extremes, it identifies games that sportsbooks have potentially shaded. For example, the Lakers might be favored by -12 points instead of the -10 that the "centered numbers" dictate. The sportsbooks know that the betting public will lean to the popular teams and heavy favorites. They will make the "Joe Public" "pay more" to take the heavy favorites. In the most lopsided-bet games, as determined by "betting percentages," you want to "Bet Against the Public" and take the same side as the long-term winners: the sportsbooks.  Betting against the public has proven to be a good contrarian investment for those who seek value in the sports marketplace. 

Disclaimer
We do not guarantee that the trends and biases we’ve found will continue to exist. It is impossible to predict the future. Any serious academic research in the field of “market efficiencies” recognizes that inefficiencies may disappear over time. Once inefficiencies are discovered, it is only a matter of time before the market corrects itself. We do not guarantee our data is error-free. However, we’ve tried our best to make sure every score and percentage is correct.