Bookies vs. Bankers on Brexit: Who's Gambling Now?

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People don’t have a clear understanding of how bookmakers make money. Bookmakers generally aren’t bettors. They set prices for betting markets and take bets on both sides and charge a fee (”the vig”). The betting markets are usually sporting events but in the UK, where bookmaking is more generally legal, bookies will quote prices on just about anything: Academy Awards, Presidential elections, where a falling satellite will crash into the Earth.

Although bookmakers will sometimes take one side of an outrageous bet for publicity (like in the mid-nineties when one UK betting shop took a £250 bet offering 500-to-1 against Elvis still being alive), their business is moving the prices to create equal betting on both sides by their customers so they are neutral as to the outcome. There is, of course, always a risk that they don’t manage the price offered sufficiently to equalize the betting in which case they would have skin in the outcome. However, what bookmakers are trying to do, if they do it well, is the opposite of betting: they make their money off traffic, like a toll booth.

I was amused by a Wall Street Journal article suggesting that bookmakers were “wrong” for making the UK a big favorite to remain in the European Union. Christian Gattiker, chief strategist at a Swiss bank named Julius Baer Group AG, actually said, “I can’t remember any time when the bookies were so wrong.” Bob Browne, chief investment officer at Northern Trust Co., said in the article that his firm’s $10 billion portfolio was down 2.8% ($280 million) the day after the vote due to its exposure to international stocks. “’People were all working with the same information that was distorted and highly correlated to their own biases,’ Mr. Browne said. But ‘there’s a difference between betting and investing.’”

That bankers in senior positions think this way might say a little something about why there was a banking crisis in 2008. What Mr. Browne (whose company clearly bet big on “remain”) should have said is that there is no difference between betting and investing, and both are much different than bookmaking and market-making.

The article doesn’t provide any evidence that the bookmakers lost money. The size of the bets at William Hill on “remain” were as high as £100,000. Although the winning bets (”leave”) had a larger payout, only three people bet as much as £10,000. In fact, the Journal actually explained how the bookies favored “remain.” After noting that “betting odds can suffer from an array of biases,” the Journal said that most of the betting took place in London, which strongly voted to remain in the EU. According to Ladbrokes, 80% of the bets outside of London were in favor of “leave.”

When an underdog wins, that doesn’t mean the bookies got it wrong. In fact, bookies are trying not to have an opinion, allowing the public to decide the betting lines that will get equal money on both sides of the proposition. They are, in that sense, professionally neutral so, by definition, they are unable to get it wrong since they are offering no opinion in the first place.

The outcome of the Brexit vote doesn’t even mean that bettors as a whole got it wrong, or that “remain” bettors got it wrong. Laying odds of 9-to-1 means you recognize that 10% of the time the underdog will win. The underdog won this time.

This all reminded me of what happens as you teach people about odds in poker. I do a lot of charity poker tournaments. I often end up dealing at the final table, and when someone is all-in and the players turn up their hands, I’ll announce the percentage one hand will win against the other when there are cards to come. I was doing a tournament at Boston Children’s Hospital when two players turned up their cards with two cards to come. I said, “this first player is 76% to win and the second player is 24% to win.” I dealt out the last two cards, one of which made the second player, the underdog, the winning hand.

In the running dialogue I had going with the crowd around the final table, someone called out, “Hey, you were wrong!” I explained that I wasn’t. “I said it would happen 24% of the time. That’s not zero. That’s actually pretty often. You got to see the 24%.”

A couple hands later, there was a pretty similar situation. After the players had all their money in the pot before the flop and turned up their cards, I said, “It’s a pair of kings against a pair of eights. The kings are 82% to win, the eights 18%.” I dealt out the five community cards, one of which was an eight. The same person in the crowd said, “Look, it was the 18%.”

That guy in the crowd got it right away. The percentages build in the possibility of something unlikely happening. If that possibility is not zero, it’s going to happen sometimes. The percentages aren’t right or wrong. Neither, generally, are bookmakers, except that they are smart enough to make money out of being neutral.

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