Eli5: How do “bookies” actually make money?

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Eli5: How do “bookies” actually make money?

In: Economics

They get a fee, often a percentage of the funds they handle, in exchange for handling transactions.

For an unofficial sort of street bookie, it’s actually quite simple.

Let’s say I want to take advantage of a contentious upcoming football game between Team A and Team B (the team naming convention was lazy that year, live with it). But, I’m **broke**; I have zero dollars. This creates a problem because “it takes money to make money”, right? I’ve done some study and Team A, they’re in trouble, obviously. Everything they’re weak at, Team B is strong at. And everything they’re strong at, Team B is stronger. Team A is toast. Without hope. No chance. Done for.

But I spot a guy outside the stadium who didn’t see those stats or didn’t believe them. He’s wearing a Team A t-shirt, waving a small flag that says “Go Team A!” on it. Hmm. This guy is pulling for a loser. Everybody near him is pulling for the same losers. My brain starts working.

So, I offer the group a wager; you guys all give me $5 each. If, somehow, your team wins, I’ll pay you back $25 each. 1:5 odds. If your revered Team A loses, you lose your five dollars, but if they win, I give you ***five*** five-dollar bills. I get 15 fans to bet $5 each; I now have $75. Now, if somehow Team A wins, I owe 15 players a total of $375, but don’t forget, Team A stinks and they have less than half a hope among ’em. If my hunch is right, I stand to make an easy $75 from a bunch of people with too much faith in a lost cause.

But then a Team B fan hears I’m offering wagers. They’re not going to let those dweebs be the only ones positioned to profit! A small group approaches me; they want to wager for their revered Team B! I do some quick math, and I figure the B team is at least a 5:1 favorite, same odds I made with Team A fans should work but reverse, so, that’s the wager I offer; For every $5 you wager, if you win, I’ll pay out $6. A 5:1 payout. They’d love better payout, but they’ve seen the same stats I’ve seen and they pretty much agree with me. 15 of them wager $5 each. They’d rather win a dollar for every five than to not place a wager and win nothing when their team wins.

At the time of kickoff, I have $150 in my pocket, $75 from those who bet on Team A, $75 from those who bet on Team B.

If Team A loses as I predict they will, I don’t have to pay those nerds who wagered on Team A ***anything***; they made their bets, they lost. That $75 stays in my pocket. I have to pay out to those who wagered on Team B. They wagered $5 at five-to-one, which means I owe each of fifteen people $6; $90.

I did have to pay out a lot of money, but I also got to keep a lot of money. At the kickoff I had $150 and I had to pay out $90. This leaves me with $60 in cash that, thanks to the losers who bet on Team A and lost, I get to keep.

“Ah, but what if more people bet on Team B?”

This is when a clever bookie says “No more bets, please.” and stops taking bets from people who want to bet on Team B. I’ll still take money from folks who want to bet on Team A because they’re a long shot, but I’m not going to let my “books” skew beyond a figure where I’d end up having to pay out more than I took in. I don’t want more Team B wagers because those will cost me money.

“Ah, but what if it’s the 4th Quarter and Team A isn’t being a loser like you thought? What if they’re winning and there’s no time left on the clock for Team B to rally and you took 200 $5 bets on Team A? How do you pay out $5000? You didn’t take in anywhere near that amount?!”

You’re very correct; this is when I take advantage of my situation; where I live, street booking isn’t legal; it’s against the law, and the penalties are quite harsh. So…I leave. I exit. When I realize I’m about to have to pay a bunch of money out, I get lost at a high rate of speed, and everybody who bet with me on either side loses because they’ll never find me, and they can’t go tell the police because in trying to rat me out, they’d have to admit to police that they attempted to place illegal bets which is a much more dire charge that’ll cost them far more money to defend against than they would have made. It’s safer and smarter for them to just swallow that I tricked them and left with their money.

That’s how stadium-side street bookies make their money; they offer long odds to fans of the team they think will lose, they offer short odds to fans of the team they think will win, and if they misjudged the teams and realize they’re about to owe more money than they have, they just run away very fast.

Sometimes, even if their prediction is right and the loser team loses, they still run away very fast, taking the wagers from both the winners and losers alike and paying neither even though they could afford to pay the winners and still have money. This is why authorities don’t like unofficial street booking; the bookie can just leave with the money before the game even starts and nobody wins, everybody loses their wager even if they should have won.

The most straight forward is adjusting the odds they offer betters so that over the large number of bets they expect to handle,they’ll make money. It’s called “positive expectancy”.

Let’s say,you’re the bookie and you think Team A only has about a 33% chance to win,so you should offer punters odds of 2/1. However,you offer shorter odds of 1/1 which implies team A should be expected to win 50% of the time. Now,let’s say someone bets $10 with you at 1/1. Assuming you’re assessment of the teams chances are correct, 2 out of every 3 times you’ll be correct and the punter will lose $10. So you win 2 x $10 = $20, and lose one in every three times, so 1 x $10 = $10, leaving you with $20 – $10 = $10 profit.

The whole process is based on the bookie being able to accurately predict the chances of something happening better than the punter.