Who pays commission? How are odds affected?
Everyone pays commission in order to be able to bet on an event. This is true either in Betfair or another bookmaker. The bookmakers have “vig” representing the commission.
Vig, which is short for vigorish, is a term used to describe the book’s theoretical edge, or commission, on each betting online wager.
So, how does this commission affect the fixed odds and more importantly, who pays for it? I hear you say “the one who backs in Betfair“. You are mistaken…
Let us assume that we have come up with a strategy, which is capable of calculating a predicted probability of the event.
As a first example we will assume this probability is 50%. Upon examining the odds Betfair offers (or elsewhere) we see that it is 2.50. Logic and basic mathematics dictate that we have to back that event. How much will we win? We will actually make 25% of our bet. We can arrive to this conclusion if we multiply 50% by 2.50. The outcome is 1.25. Anything above 1 is considered profit and this is another way to figure out if we should make that bet. So, 1.25 – 1 = 0.25. This is the % we will profit in the long run in case our strategy can calculate the exact true probability.
In other words, by betting 100 identical bets, we will make 75 units (=50 *(2.50-1) ) out of 50 bets and will lose the other 50 bets. So, out of 100 bets (100 units) we will make 25 (=75-50). Therefore, 25% of our total stake.
If then they apply 5% commission on our winnings, every winning bet will return 1.425 (=1.5 * 0.95) and not 1.5. Betting the same 100 events, we will profit by 71.25 units and lose 50, accumulating 21.25 units instead of 25.
When we see 2.50 odds in Betfair, it is in fact 2.425 after commission. Still, 2.425 * 50% results once again over 1, therefore making us bet on it with positive value. We just have 3.75% less profit due to the commission.
Let us say now that having calculated the probability at 50%, the odds offered are 2.05. If there was no commission whatsoever, we would have to submit the bet once more, since 2.05 * 50% > 1. But if there is 5% commission on the winnings (1.05 * 0.95) then we arrive at true odds of 1.9975 (=1+ (1.05*0.95) ). Now 50% * 1.9975 results below one, so we shouldn’t bet although the odds prior the commission is above 2.00.
As a third example, we will presume that the odds are now 1.80. We can easily figure out that 1.80 * 50% is well below 1 and will leave it alone. As a matter of fact, betting on such an event will lose us 10% of our total turnover in the long run (even without taking commission into account!). If we add the commission’s effect on that, the bet costs us about 12% of any amount we bet with! If for instance we bet 100€, we would have lost 12€ in the long run either winning or losing that particular bet. If we make that same bet 100 times, our losses will have climbed to 1,200€!
Hmmm… now, hold on a minute you’ll say. If we have 100 bettors like the above who make 100 bets like the above, we are talking about 120,000€ which are lost by them! SOMEONE MUST get that money for sure!
The ones that get them are those who having calculated the true probability at 50% and seeing the odds at 1.80 are placing a LAY on the event. Therefore, whenever we calculate the probability * odds less than one, we submit a lay. So, that’s it? We do that ALWAYS whenever we come to that conclusion? NO! We should once again take into account the commission. Here things will look a little tougher, due to the “lay”.
By laying at 1.80 and applying 5% commission on the winnings, everytime we lose we pay 0.80 units and get paid 0.95 (=1-5%) for every winner. So, the real odds we lay at are 1.842 (=1+(0.80/0.95) ). If we multiply this number with 50% we still come up to a number below 1, so we must lay in order to be correct.
How much expected value (EV) do we expect by our move? |50%*1.842 -1| = |-0.079| = 7.9%
So, by laying 100 times each of the aforementioned bettors/backers (10,000 lays) we would have won 79,000€.
Question: Hey, backers lost 120,000€, we won 79,000€, where is the 41,000€??
I welcome you to magical world of commission! That money would have ended up in Betfair’s account!
100 bettors lose 100,000€ during a month, and some other bettors win that 100,000€. Both sides however pay about 20,000€ for their hobby during the month. 20% commission you say? Of course not! Remember, the first 100 bettors (backers) would have played 100 bets of 100€ each one of them in order to lose 100K€. The total VOLUME of each bettor would be 10,000€. All together would have staked 1.000.000€ during that month and betfair would have got paid 20,000€ for those bets. 2% on the backers. Respectively, we conclude the same amount about the commission paid by the layers at the same time.
After studying all the above, we can say that commission is paid by BOTH backers AND layers, and indeed 50-50!
The issue here is to learn how to bet correctly when we have to deal with probabilities. Do you believe an event to have 80% probability and you find small odds of 1.40? Wrong! I remind you, 80% * 1.40 = 1.12. You in fact DON’T get 12% profit!
Do you have a feeling about an event, your method dictates 50% probability but the odds offer 1.75 and you still want to back it? Wrong again! You MUST submit a LAY! Remember, 1.75 * 50% = 0.875. You DON’T get 12.5% profit!
You examine a 50% event on 2.05 odds? Do you calculate the commission, arrive to a number below 1 and decide to lay? Wrong! You should consider the commission even when you lay. When 2.05 is 1.9975 after commission for backing, it is 2.116 for laying after commission (do you own calculations to see if you are right). 2.116 * 50% results a number well above 1 and “that” above 1 is your losses in the long run!
Read here how you can calculate the commission you pay to Betfair.