Amidst the hype currently surrounding the prediction market industry, some commentators have called for betting exchanges like Betfair and TradeSports to translate their odds into probabilities. Behind this call, one suspects, lies the common error of misinterpreting bookmaker and betting exchange odds as win probabilities.

In practice, bookmakers and betting exchange odds do not sum upto one. The sum of the odds is called the over-round and the sum exceeding one reflects the bookmaker's/market maker's margin.

Let us look at one of the markets most favoured by the prediction market advocates - The 2008 US Presidential Elction Democratic Candidate market. Betfair's market on this event is currently trading as follows;

To go along with the odds into probabilities camp, we have in the table below translated the current odds straight into probabilities. Surprise, surprise, the odds do not sum upto one!

In order to obtain normalized fair probabilities, we must return to the over-round. We saw that the market on Betfair was trading to an over-round of 103.2. In order to obtain normalized fair probabilities, we must assume that the "excess probability" is evely distributed across all selections, and divide each of the probabilities in the above table by 1.032 This leads us to obatin the following normalized fair probabilities.

Of course, in the case of Trade Sports and Betfair, the situation is complicated further, by the fact that market commissions should actually be factored into the over-round. In the case of Betfair, commission rates vary from between 2% and 5%. Any attempt to translate odds into probabilities, would of course, have to take into account the commission rates faced by each individual trader. The issue of the ever present favourite-longshot bias also raises problems when one is seeking to obtain normalized fair probabilities.

The odds into probabilities camp should refine their argument, in the light of the above, whilst Betfair should reveal the formula that it uses when computing their "implied chance" graphs.

P.S. Looking at the latest Intrade market on the Democratic nominee race, we see, if we only take Hilary Clinton and Barack Obama, that the sum of the probabilities is greater than 1! This fact alone, raises quite significant efficiency concerns rergarding this market and its probalistic potentialiities.

Play Online Poker

Copyright © 1997 - 2007 Bettingmarket.Com et/ou entreprises liées. Tous droits réservés. Terms and Conditions Apply .