Fixed odds betting

What Is Fixed Odds Betting?

Fixed odds betting is a form of gambling where individuals place bets on the outcome of an event, such as sports matches or horse races, at predetermined odds. In fixed odds betting, the odds are established and agreed upon at the time the bet is placed. This means that the potential payout for a successful wager is known to the bettor upfront, regardless of any subsequent changes in the odds leading up to the event. This concept falls under the broader category of risk management as it involves assessing and taking on financial risk based on a defined potential return. Bookmakers, often referred to as bookies, are central to fixed odds betting, setting the odds to ensure a profit margin.

History and Origin

The practice of wagering on events has ancient roots, with early forms of betting recorded as far back as 2000 years ago during events like the ancient Greek Olympics and Roman gladiatorial contests²², ²³. However, the organized system of fixed odds betting, as recognized today, began to take shape much later. The emergence of the bookmaker as an intermediary who sets and accepts bets can be traced to 18th-century England, particularly with the rise of horse racing as a popular pastime¹⁹, ²⁰, ²¹.

One significant figure in the development of modern fixed odds betting was Harry Ogden, who, around the 1700s, recognized the varying probabilities of horses winning races and began offering different odds to reflect these likelihoods. This systematic approach to setting odds marked the inception of the bookmaker's role in creating a structured betting market¹⁸. The Industrial Revolution further spurred the formalization of sports betting in 19th-century Britain, with horse racing becoming a significant part of the national economy¹⁷. Over time, fixed odds betting expanded beyond horse racing to encompass a vast array of sports and events, evolving significantly with the advent of the internet and online platforms in the 1990s¹⁵, ¹⁶.

Key Takeaways

• Fixed odds betting involves placing a stake on an event where the potential return is fixed at the time the bet is placed.
• The odds are set by a bookmaker, who aims to build in a profit margin, often referred to as the "overround."
• Bettors know their potential winnings before the event takes place, offering clarity on the risk-reward profile.
• This form of betting contrasts with other methods, such as pari-mutuel betting, where final payouts depend on the total money wagered by all participants.
• While offering straightforward returns, fixed odds betting carries inherent risks, and outcomes are determined by chance and skill in assessing probability.

Formula and Calculation

In fixed odds betting, the payout is calculated using the accepted odds and the bettor's stake. Odds can be presented in various formats, including fractional, decimal, and moneyline.

Decimal Odds:
Common in Europe, Australia, and Canada, decimal odds represent the total return (including the original stake) for every unit wagered.

$\text{Payout} = \text{Stake} \times \text{Decimal Odds}$

For example, if the decimal odds are 2.50 and the stake is $10, the total payout would be ( $10 \times 2.50 = $25 ). The profit would be ( $25 - $10 = $15 ).

Fractional Odds:
Predominant in the UK and Ireland, fractional odds show the profit relative to the stake.

$\text{Payout} = \text{Stake} \times \left( \frac{\text{Numerator}}{\text{Denominator}} \right) + \text{Stake}$

For example, if the fractional odds are 5/1 and the stake is $10, the profit would be ( $10 \times (5/1) = $50 ). The total payout would be ( $50 + $10 = $60 ).

Moneyline Odds (American Odds):
Used in the United States, moneyline odds indicate how much one needs to bet to win $100 (for negative odds, representing the favorite) or how much one wins for a $100 bet (for positive odds, representing the underdog).

• For positive odds (e.g., +150):
  $\text{Payout} = \text{Stake} + \left( \text{Stake} \times \frac{\text{Odds}}{100} \right)$
  For a $10 stake at +150 odds, the profit is ( $10 \times (150/100) = $15 ), and the payout is ( $10 + $15 = $25 ).

• For negative odds (e.g., -200):
  $\text{Payout} = \text{Stake} + \left( \text{Stake} \times \frac{100}{\text{Odds}} \right)$
  For a $10 stake at -200 odds, one must risk $20 to win $10. So, the profit is ( $10 ), and the payout is ( $10 + $10 = $20 ). (Note: This formula shows how much profit is generated for a given stake, or how much stake is needed for a given profit. For a $10 stake, it's easier to think of it as profit = $10 / (200/100) = $5. So payout = $15).

The core of fixed odds betting involves understanding how these odds translate into potential gains, directly impacting the expected value of a bet.

Interpreting Fixed Odds Betting

Interpreting fixed odds betting involves understanding the relationship between the quoted odds and the implied probability of an event. Bookmakers set these odds to reflect their assessment of an outcome's likelihood, while also building in a margin to ensure profitability. For a bettor, interpreting the odds means evaluating whether the implied probability offered by the bookmaker is higher or lower than their own assessment of the true probability.

For example, if an event has decimal odds of 2.00, it implies a 50% chance (1 / 2.00 = 0.50). If a bettor believes the actual chance of that event occurring is greater than 50%, they might consider it a favorable bet, representing a positive expected value. Conversely, if they believe the chance is less than 50%, the bet would be unfavorable. Savvy bettors often look for discrepancies between the bookmaker's odds and their own statistical models or insights to identify such value. This constant evaluation and comparison are fundamental to engaging in fixed odds betting beyond mere speculation.

Hypothetical Example

Consider a football match where Team A is playing Team B. A bookmaker offers the following fixed odds for the match outcome:

• Team A to win: 2.20 (decimal odds)
• Draw: 3.40 (decimal odds)
• Team B to win: 3.10 (decimal odds)

A bettor, Sarah, decides to place a $50 stake on Team A to win.

Scenario 1: Team A wins
If Team A wins the match, Sarah's bet is successful. Her total payout would be calculated as:
$\text{Payout} = \text{Stake} \times \text{Decimal Odds} = \$50 \times 2.20 = \$110$
Sarah's profit in this scenario would be ( $110 - $50 = $60 ). This outcome demonstrates the fixed nature of the payout; she knew her potential return at the moment she placed the bet.

Scenario 2: Team B wins or the match is a draw
If Team B wins or the match ends in a draw, Sarah's bet on Team A to win is unsuccessful, and she loses her initial $50 stake. This example highlights how fixed odds betting provides a clear understanding of both potential gains and maximum losses from the outset.

Practical Applications

Fixed odds betting, while primarily associated with gambling, showcases principles applicable in broader financial markets and decision-making.

• Price Discovery: In betting markets, the movement of odds can reflect new information or a shift in collective sentiment, similar to how prices move in financial markets in response to news or trading activity. This dynamic helps in the price discovery process for the perceived likelihood of an event.
• Risk Assessment: Participants in fixed odds betting constantly engage in risk management by evaluating potential outcomes against offered odds. This involves assessing probability and potential return, a fundamental skill in any investment strategy.
• Market Efficiency Studies: Academic research often uses fixed odds betting markets to study concepts like market efficiency and behavioral biases. For instance, the "favourite-longshot bias," where bets on less likely outcomes tend to offer poorer value, has been observed in fixed odds markets, suggesting irrational behavior or risk-aversion among bettors and bookmakers¹⁴.
• Arbitrage Opportunities: While rare, discrepancies in odds offered by different bookmakers for the same event can create arbitrage opportunities. This involves placing bets on all possible outcomes across different bookmakers to guarantee a profit, regardless of the result. Such opportunities highlight market inefficiencies, similar to those sought in traditional financial trading.

Limitations and Criticisms

Despite its widespread appeal, fixed odds betting faces several limitations and criticisms, particularly concerning consumer protection and its potential for problem gambling.

One significant criticism centers on the concept of "overround" or "vig" (vigorish), which is the built-in profit margin for the bookmaker. The sum of the implied probabilities for all possible outcomes in a fixed odds market often exceeds 100%¹³. This "overround" ensures a profit for the bookmaker if they manage their liabilities across all outcomes effectively, meaning that, in the long run, bettors are statistically expected to lose money.

A major point of contention, particularly in the United Kingdom, has been Fixed Odds Betting Terminals (FOBTs). These electronic machines, found in betting shops, offer casino-style games with fixed odds, such as roulette¹². Critics dubbed them the "crack cocaine of gambling" due to their fast pace, high stake limits, and perceived addictive nature¹¹. Concerns over their contribution to problem gambling led to significant regulatory intervention. In 2019, the UK government reduced the maximum stake on FOBTs from £100 to £2, a move aimed at mitigating potential harm. ⁹, ¹⁰This regulatory change significantly impacted the betting industry, leading to concerns about betting shop closures and job losses. ⁷, ⁸Academic research also suggests that the causes of problem gambling are complex and not fully understood, making it challenging to attribute causality solely to specific betting products. ⁵, ⁶Furthermore, the rapid growth of online fixed odds betting markets has also brought concerns about accessibility and the potential for increased problem gambling.
⁴
Another limitation for successful bettors is the risk of having their accounts closed or restricted by bookmakers for consistently winning too much money, as bookmakers aim to protect their profit margins.
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Fixed Odds Betting vs. Pari-mutuel Betting

Fixed odds betting and pari-mutuel betting are two distinct methods for wagering on event outcomes, primarily differing in how payouts are determined.

In fixed odds betting, the odds are agreed upon and locked in at the time the bet is placed. This means the bettor knows their exact potential payout before the event begins. The odds reflect the bookmaker's assessment of the probability of each outcome, with a built-in margin for profit. The bookmaker bears the risk and manages their liabilities based on the bets placed.

Conversely, pari-mutuel betting (or pool betting) does not have fixed odds. Instead, all bets on a specific outcome are placed into a common pool. The final payouts are determined only after the event concludes, based on the total amount of money in the pool and the number of winning tickets. A commission (the "take-out") is deducted from the total pool by the operator, and the remaining money is then divided among the successful bettors. This means the odds and potential payouts can fluctuate right up until the start of the event, as more money enters the pool. Pari-mutuel betting is commonly used in horse racing in some jurisdictions.

The key difference lies in certainty: fixed odds betting offers upfront certainty of potential returns, while pari-mutuel betting offers dynamic, post-event payouts based on the collective wagering of all participants. Pari-mutuel betting effectively pits bettors against each other, whereas fixed odds betting pits bettors against the bookmaker.

FAQs

Q1: Is fixed odds betting the same as sports betting?
While most sports betting involves fixed odds, the term "sports betting" is broader and can also encompass other forms, such as pari-mutuel betting or exchange betting. Fixed odds betting specifies the payout structure.

Q2: How do bookmakers determine fixed odds?
Bookmakers use a combination of statistical analysis, historical data, expert opinion, and market factors to set their initial odds. They then adjust these odds based on betting patterns, aiming to balance their liabilities and ensure a profit margin (the "overround").
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Q3: What does "return to player (RTP)" mean in fixed odds betting?
Return to Player (RTP)) is a theoretical percentage that indicates the proportion of all money wagered on a particular game or machine that is paid back to players over time. In fixed odds betting, particularly on electronic terminals, the RTP is often displayed by law and represents the long-term expected return to the player, with the remaining percentage being the house edge.
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Q4: Can fixed odds change after I place my bet?
No. In fixed odds betting, once you place your stake and the bet is accepted, the odds for your specific wager are locked in. The potential payout you agreed to remains the same, even if the bookmaker changes the odds for new bets placed by other customers.

Q5: Is fixed odds betting considered an investment or diversification tool?
No, fixed odds betting is a form of gambling and not a traditional investment. It involves high risk and outcomes often depend on chance, making it unsuitable for wealth accumulation or financial planning purposes. While concepts like risk management and probability are involved, it differs fundamentally from investment vehicles which aim for long-term capital appreciation or income generation, often with more predictable returns and regulatory oversight.