Pricing and Probability

Whether it be an initial show from a bookmaker or a tissue price in one of the many racing publications, when a race is priced up, you are looking at an initial opinion of each horses chances of winning the race.

In their opinion - a horse that has odds of 2-1 has a 33.3% theoretical chance of winning the race. A horse that is 4/1 has a 20% chance.

The probability figure is calculated very simply by dividing 100%  by the digital odds of the horse

E.g.   A horse that has odds of 2-1 has digital odds of 3.0 - therefore the calculation is 100% divided by 3 = 33.3% chance of winning the race.

Performing this calculation on every horse in a race and adding them together will bring you to a percentage figure somewhere between 100% and 120% - the excess above 100% represents the bookmakers profit margin

The probability percentage is a snapshot in time. Once betting commences, prices will fluctuate depending on how much money is bet on each horse.

Bookmakers need to maintain a balance of money on each horse in order to ensure they are not overexposed on any one particular horse - if horse A attracts a lot of money by the betting public, the bookmaker will be overexposed should that horse win. To offset this exposure, the price of the horse will shorten , which will have two effects for the bookmaker -

1/ It will reduce the bookmakers liabilities on all bets placed at starting price

2/ A shorter price will make the horse less attractive to bet and thus reduce the inflow of money coming for the horse.

When the price shortens to maintain an even book it is likely that the other horses prices will increase - this has the reverse effects on these horses and the higher price likely to attract more money towards them.

Value

A changing price does not change the horses chances of winning in respect of the  original  opinion. It is an indication of what the betting public favours to win the race and this could be interpreted in a number of ways:

• If the original estimation of the horses chances of winning was correct - this would now mean that a horse that has shortened from 3-1 to 2-1 represents poor value as you are getting a 33.3% probability price on a horse that has only a 25% chance of winning

• Alternatively the market place maybe correct and is indicating the true price of the horse and its respective chances of winning.

• Or maybe the market place has started a betting frenzy on one horse and the horse has been over bet. This again would mean that the price is now less than the horses true chances of winning the race.

In reality the true chance is probably somewhere between the market price and the original price. 

Finding value is where you can bet or lay a horse at a price that gives you the advantage. For example.

If a horse has a 20% (4-1) chance of winning, but has been bet in to 2-1, that could be seen to represent good value as a lay bet.

Likewise a horse that had a 33.3% (2-1) chance of winning and has drifted in the market to 4-1, this could represent excellent value as a win or place bet.