Maintaining a properly balanced book
Maintaining a well-balanced book enables a bookmaker to keep steady profits coming in and helps to protect a bookmaker from unexpected losses better.
Having an imbalanced book makes earning a profit too much dependable on the outcome of the event, and, even, exposes a bookmaker to a risk of incurring a loss. Evidently, a balanced book is a safer strategy to pursue, and this is the principle that odds compilers try to stick to.
Using that same tennis tournament case and applying 60% vs 40% chances, an example of a balanced book would be the following:
Let us say, a bookmaker applies the 60% and 40% chances and collects cash from sixty $100 bets on Nadal and forty $100 bets on Federer. A total of $6000 is received by the bookmaker from wagers on Nadal at the odds 1.59, and $4000 from wagers on Federer at the odds 2.38. Therefore, the total proceeds from wagers would equal $10,000.
If Nadal wins, the bookmaker will be obliged to pay out $9,540, and will make a $460 profit, while a victory by Federer would yield a profit of $480 after subtracting $9,520 of payouts to punters. In this scenario, a bookmaker is set to make a 5% profit regardless of which player actually wins the tournament. Therefore, in this case, the bookmaker’s book is balanced properly.
Something different would happen if the bookmaker decided to apply the odds evenly attributing 50% vs 50% chance to both players. With this scenario, the bookmaker will receive $5000 from bets on each player. If Nadal wins, after paying out $7, 950 to punters, the bookmaker would stand to make $2,050 profit, which amounts to 21% (!). However, should Federer win, the bookmaker would suffer a 19% (!) loss, having to pay out to punters $11, 900, which is by $1,900 more than $10, 000 received in total wagers.
Despite the even distribution of probability, this scenario represents a high risk for the bookmaker, as he would incur a significant loss, should one outcome prevail over the other. In this instance, the bookmakers’ book is imbalanced. It is wise for bookmakers to try to avoid such types of situations. Quite often though, in cases when bookmakers are confident about a particular outcome, bookmakers do choose to take a risk and get a higher profit margin reward.
Odds on sports events tend to fluctuate over time, and maintaining sportsbooks properly balanced requires a continuous adjustment of odds by odds compilers. In the above example, odds compilers could decrease the odds for Federer to deter punters from placing more bets on his winning, or raise the odds for Nadal to attract more punters’ bets on his winning. They could also use both methods at the same time.
In addition, having a large volume of bets is just as important for bookmakers for balancing out their books right and making good profits. The more cash proceeds come from punters’ wagers, the higher the chances for getting the balance right.
In such a volatile business as sports betting, the adjustment of odds may not reflect a well-balanced book all the time. It is understandable that a perfectly balanced booked is a rare occasion in bookmakers’ business. Nevertheless, this is something that bookmakers should strive to do in order to optimize their profits.