Probability and Price

How do Bookmakers set their prices ?  How do insurance companies set premiums ?

The ultimate answer:  demand.

To begin with however a bookmaker must have an opinion, or base it someone elses opinion who has a good track record, as to the way an event will run.

Theorectically (at least in my opinion), a 20% chance should be fairly priced at 4-1, a 50% chance 1-1, and 80% chance at 1-4 on.

In order to win long-term, a premium needs to be added to the price – let’s say a 50% premium. So a $5 fair price needs to be listed at $7.50 to make the betting proposition worthwhile. In the case of insurance companies, they are the bookmakers and in this case charge a premium of $7.50 (or more, depending on demand).

In his book titled ‘Money Secrets at the Racetrack’, Barry Meadow puts it this way:  Analyze chances, rather than attempt to pick winners.

The ideas presented in this book has changed the way I view all betting propositions, whether it be on sport, horses, or trading options. Given a set of circumstances that you understand, what is the probability of it going the way you want it to based on experience, and / or statistical data, and / or supply and demand.

Whatever factors you decide on to include in your assessments, you can then determine from historical data how accurate you are and this becomes another factor to consider in future decisions.

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