Friday, March 27, 2009

Explaining the odds – Part 2

I hadn’t planned on splitting this in to two parts when I started it, but decided it would have been a little lengthy to put everything in to a single post.  Last time I explained how the odds are used to calculate your potential return and that for the purpose of this experiment and blog I will be using decimal odds, so let me explain why I made this choice in a little more detail.

There are two key things to remember about this experiment when considering odds, the stake and the goal.  The whole purpose of what I am doing is to try and beat the interest rates offered by banks.  Decimal odds make it very easy to compare potential returns to interest rates particularly as I am using £1 stake for all the bets. Lets take a closer look.

If I place a bet at odds of 1.20 I am getting a 20% return on my investment.  If I place a a bet at odds of 1.05 I get a return of 5% on my investment.  As you can see its very easy to see the ‘interest rate’ from the odds.  Compare this to fractional odds of 1/5 (1.20) and 1/20 (1.05) where the percentage return is less obvious.  When the odds are at evens (2.00) or higher it is perhaps not as instantly obvious what the equivalent percentage rate is but it is simple to work out using decimal to percentage conversions (i.e. 1.00=100%, 0.50=50%, 2.00=200%.)  We just need to subtract 1 from the odds and convert to a %.

Example
Odds of 3.50 = 250% return (3.50-1=2.50)
Odds of 1.25 = 25% return (1.25-1=0.25)

Finally, I would just like to explain a few phrases regarding odds that I may use later in the blog just in case any readers aren’t already familiar with them.

Short odds – These are low odds where the potential return is relatively small.  Odds moving from a higher value to a lower value are said to be ‘shortening’.

Long odds – These are high odds where the potential return is relatively large.  Odds moving from a lower value to a higher value are said to be ‘drifting’.

If you didn’t have an understanding of betting odds before, hopefully things will be a little clearer now and allow you to follow what I am doing as I go along.