With Tadgh Hegarty, Applied Economics, 2025.
Advice to bettors often tells them to figure out the bookmaker’s margin (the sportsbook’s hold in US terms) by calculating the “overround” (the sum of implied probabilities) from the odds.
This paper shows that this overround-based calculation is correct as long as the odds satisfy what is known as “strong betting market efficiency” meaning the bookmaker applies the same percentage margin to each bet.
But the evidence shows that in many markets, bookmakers apply a bigger profit margin to bets on longshots than bets on favourites. We show that when this is the case, the overround-based margin is lower than the average loss rate across all the bets on an event. We use evidence from soccer and tennis to show how average losses across the bet available bets are indeed higher than implied by the overround calculation.
Key research finding: The standard margin calculation is correct under certain conditions but those conditions often don’t hold.
Practical advice: Calculating margins from the odds is useful but it will understate the amount you would lose on a randomly picked bet.