Beware ‘The Vig’…
‘The Vig’ is a hideous and foul beast, the thing of nightmares for sports punters.
The vig or vigorous, is essentially how the bookmakers are able to maintain an advantage over the average punter and (almost) guarantee a profit. It is also known as a bookmakers margin and is sometimes used interchangeably with the term overround although they are slightly different as explained below.
Let’s take the Sportsbett odds I posted for Brisbane vs Parramatta in round 1 of the 2016 season as an example. The odds (at time I posted) were 1.65 for the Broncos and 2.35 for Parramatta. Turning those odds into implied probabilities (1/odds) that indicates the bookies are giving broncos a 60.6% chance of winning and Parramatta a 42.5% winning. Hmmm…. 60.6 + 42.5 gives 103.2%. That extra 3.2% is how those sneaky buggers make their money… This 103.2% is actually termed the overround
Although it makes little difference in this example, but is important for explaining the outcome, the real value of the vig is actually (1.031-1)/1.031 = 0.31 = 3.1% and this represents the bookmakers expected profit margin.
Hers how it works in a nutshell using a simple example:
Given the odds on broncos and Parramatta, the bookmakers expect to drive the market (ie drive punters) towards betting specific proportions on the outcomes. If the bookmakers drive the market so that the proportions are equal to the reciprocal of the odds multiplied by the overround then they are guaranteed the 3.2% (vig) profit. The reciprocal of the odds multiplied by the ovveround is really just normalizing the implied probabilities to 100%
Using the figures above the proportions the bookmakers are driving the market towards are:
1/(1.65*103.2) = 0.587
1/(2.35*103.2) = 0.413
0.587 + 0.413 = 1
If they have successfully driven the market to these proportions and end up with $58.7 wagered on the Broncos and $41.3 on Paramatta (total of $100 wagered in the market) then:
If Broncos win they have to pay the punters back $58.7*1.35 = $96.9
Which means they profit $3.1
If Parramatta wins then have to pay the punters back $41.3*2.35 = $96.9
Which again means they will profit $3.1
This profit, as a % is equal to the devilish vig (3.1/100 = 3.1%)
Odds movement is all about driving the market towards these proportions so the bookmakers can make profit. In cases where the odds are close to even (2.0) then sometimes the market will drive the implied outcome. For example, if the bookmakers originally post odds in favor the Tigers to win (say 1.9 = 53% implied probability) but there is a large amount of money staked on the alternative team (say St George) to win, then they will shift the odds in attempt to realign the market towards the vig. This might mean that the original odds move, for example, to 2.2 (45% implied probability) now indicating that the bookmakers think that St George will win. In reality it is the market (ie punters) that has shifted the implied outcome.
Beware the vig!!