Pricing and Probability
When a bookmaker prices up a race they are showing you their initial opinion of each horse's chance of winning the race.
In their opinion - a horse that has odds of 2-1 has a 33.3% 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
These initial probability percentages are obviously a snapshot in time. Once betting in the market 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 if one particular horse attracts a lot of money by the betting public. 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 prices of the other horses will increase - this has the reverse effect on these horses and the higher price will likely attract more money towards them.
The bookmakers can of course lay off some of the bets that have been placed with them with other bookmakers to even their book.
A changing price does not change the horses chances of winning in respect of the original assessment by the bookmaker. The changing prices become an indication of what the betting public favours to win the race and this can have different impacts on your own betting.
For example. If the original estimation of the horses chances of winning were correct - this would now mean that a horse that has shortened from 3-1 to 2-1 represents poor value as you are receiving a 33.3% probability price (2-1) on a horse that has only a 25% chance of winning. (3-1 original estimate).
Alternatively the market maybe correct with its assessment of the race and is now indicating the true price of the horse and its respective chances of winning (at a price of 2-1).
Or maybe the market place has started a betting frenzy on the horse and the horse has now been over bet. This again would mean that the price is now less than the horses true chances of winning the race, but that the true chance is probably somewhere between the market price and the original price.
Finding value, is the process of finding the bet that moves the advantage to you. 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, as you would lay it at a price that says that the horse has a 33% chance of winning when actually it only has a 20% chance.
Likewise a horse that had a 33.3% (2-1) chance of winning and has drifted in the market to 4-1, could now represent excellent value as a win or a place bet.