SportsInsights.com Article
An Economist’s “Micro-Analysis” of the Sports Marketplace

Economists often study supply and demand – or analyze other themes – related to global economies and financial markets. In this article, SportsInsights.com’s “economist” will take a break from studying interest rates and global currencies – to take a “micro” look at the sports marketplace. What is going on inside the sports betting world? How do sportsbooks maximize their profit margin? What does this mean to other sports marketplace participants such as sports bettors?

The goal of this article is to study the “market structure” of the sports marketplace and determine if we can match theoretical ideas with real world results. The information on this site is for entertainment and educational purposes only. Use of this information in violation of any federal, state, or local laws is prohibited.

Sportsbook Profit Margins: Simple “Centered” Example

For the purpose of this article, we will use the standard “–110” line for vigorish and other computations. You must lay $110 to win $100. If you win the bet, you receive $210 (your original $110 plus the $100 winnings). If you lose the bet, you lose $110.

The sportsbook, in this example, would receive $10, or 4.5% of the combined $220 “betting action.” A bettor would need to win 52-53% of their bets to break even. This study used both moneylines and spreads – and a wide range of examples – to verify results and computations.

In our simple “Centered” example, the Moneylines and point spreads are centered exactly on the expected probabilities of the games’ outcomes. For example, a game priced at 180/-220 is “centered” at 200 – so that the favorite is expected to win two-thirds (66.7%) of the time. We studied the “micro-structure” of this “simple sports marketplace” – as well as other variations – to study how sportsbooks might behave.

In this simple “centered” example, no matter WHAT THE PUBLIC does, the sportsbook will maintain a 4.5% profit margin. Individual games will lead to profits and losses for market participants (bettors, the “betting public in general,” and the sportsbooks) – but the long-term will result in a 4.5% profit margin for the sportsbooks.

Sportsbook Margins: “Shading” Example

Now, what happens to these results if sportsbooks shade their lines to exploit human tendencies? A simple example that SportsInsights.com has discussed in the past – is the fact that most people like to bet on favorites and overs. Sportsbooks could “pad their pockets” by shading the lines to “overprice” favorites and overs, on average.

There have been several articles and sources that suggest that this “shading” takes place. Levitt’s academic article states that sportsbooks could potentially improve their profit margins 20-30% by shading their lines.

Here, we study the market structure of the sports betting world and see if this makes sense. What if a sportsbook:
  • instead of – centering the line (or probability) of a game “exactly as expected” –
  • shaded their lines to make certain teams more expensive?

First, we studied a sportsbook’s profit margin if they shaded their lines so that the “probability distribution” was shifted 1%. In our example above, the game priced at 180/-220 is “centered” at 200 – so that the favorite might be expected to win two-thirds (66.7%) of the time. Since the sportsbooks know that most people will want to bet on the favorite, they might shift the probability distribution – or pricing – of the event so that this favorite might win only 65.7% of the time.

We computed a sportsbook’s expected profit margin based on results over a wide range of events (small favorites, heavy favorites, etc.). Note that the percentage of public money (on the “overpriced side”) – impacts results and expected profit margin. For the purposes of the table below, we assume that each bet is the same size.

 

Table 1: Sportsbook Profit Margin –

A Function of Probability Distribution “Shading” and Public Money

 

Public % on Overpriced Side

Profit Margin (Prob Dist Shaded 1%)

Profit Margin (Prob Dist Shaded 2%)

Profit Margin (Prob Dist Shaded 3%)

100%

6.3%

8.2%

10.2%

80%

5.6%

6.7%

8.0%

60%

4.9%

5.3%

5.7%

50%

4.5%

4.5%

4.5%

40%

4.2%

3.8%

3.4%

20%

3.5%

2.3%

1.2%

0%

2.8%

0.9%

-1.1%

 

Conclusions: What does this mean?

Based on the results in Table 1: Sportsbook Profit Margin, we see that there is, indeed, a strong incentive for sportsbooks to shade their lines, on average. Below are some notes and conclusions.

• If sportsbooks shade their “probability distributions” just 2-3%, their expected profit margins do, in fact, increase 20-30% (from 4.5% to 5.3%-5.7%, at the Public 60% level). Profit margins are even higher at higher Public % and higher “shading” levels.

• If sportsbooks shade their lines 3% or more, they are starting to “leave some on the table” for sports investors with good information. Note the highlighted –1.1% at the bottom-right of Table 1.

• With many sports bettors paying reduced vig (or shopping around for “softer lines”), sportsbook profit margins are being pressured all the time. Lower margins give sportsbooks even more incentive to shade their lines – and improve their profits.

• These results agree with SportsInsights’ – and most people’s – philosophy that it pays to be a contrarian investor and “Bet Against the Public.”

• Based on SportsInsights’ results (that have been profitable over the years, across various major sports), it seems like sportsbooks could be shading their “probability distributions” as much as 3-4%.

We believe that serious sports investors can earn a profit in the sports marketplace. In this article, we used some theoretical tools to analyze the real-world sports betting world. We showed how – and why – sportsbooks might price sporting events the way they do.

These are just some of the reasons why SportsInsights’ tools and statistics are effective and can help you succeed in sports investing. Note, however, that the sportsbooks have a nice cushion to work with (the vig!) so it takes a lot of hard work! This is why we always encourage a cooperative effort – and ask that you share your thoughts and ideas on our forums so we can learn together!

Disclaimer
We do not guarantee that the trends and biases we’ve found will continue to exist. It is impossible to predict the future. Any serious academic research in the field of “market efficiencies” recognizes that inefficiencies may disappear or fade over time. Once inefficiencies are discovered, it is only a matter of time before the market corrects itself. We do not guarantee our data is error-free. However, we’ve tried our best to make sure every score and percentage is correct.