As bank interest rates tumble and savings rates drop to levels unheard of in most of our lifetimes, readers might be forgiven for looking at alternative ways to make their money work for them. Could online betting be the answer?
Before we go any further here’s a health warning: this piece is about ways in which you can use the gambling industry creatively. It's not about "systems", which almost without exception are flawed and will sooner or later lead to your losing money: it is about quirks that tend to be thrown up by the running of any betting book – exploits, if you like - which are easier to identify online than off.
We certainly aren’t advising you to make up the shortfall in your pension fund by putting your life savings on today’s racing from Cheltenham: and if you are foolish enough to do so, then on your head be it. No - this is about a perfectly respectable practice known to economists as "arbitrage", of which more later.
Let’s start with some basics. Most punters are familiar with simple "back" bets. These involve putting down money (your "stake") on the premise that if a certain outcome occurs – your horse wins a race, your candidate becomes US President – someone else, usually a bookmaker, will pay you back your stake plus a little extra.
When you place a bet, the bookmaker will quote you odds for that bet. In the UK and Ireland, you are most likely to have come across “fractional” odds. These quote the net total that will be paid out relative to your stake, if you win. 2-to-1, therefore, means for every £100 bet, you will get back £300 - your £100 stake, plus £200 profit.
If you’re betting in Europe, Australia or Canada, you are more likely to encounter "decimal odds", which reflect the total payout: take the fractional bit of the odds quoted and add one. Fractional odds of 2-to-1 give decimal odds of 3.0: fractional odds of 2-to-5 decimalise as 1.4.
American bookmakers favour a system known as moneyline, which is the amount of money that will be won on a $100 wager: a moneyline quote of $200 represents fractional odds of 2-to-1.
Next you need to understand the concept of a "book". This is the total set of odds associated with outcomes around a given event. What is of interest here – if you are looking to make yourself some money – is whether a book is "fair" or whether it holds some advantage for you.
If a friend was foolish enough to offer you odds of 50-to-1 on Gordon Brown winning the next election and the same odds on his losing, then you should bet at once. The odds are ludicrously skewed – in your favour – and for a simple investment of £2, you are guaranteed a return of £49, whatever the outcome.
Not all books are quite so easy to deconstruct. To do so, you need first to convert odds to relative probabilities, and then add up the total probability on the book. That’s easier than it sounds. For odds of a-to-b, the relative probability is given by b/(a + b): 2-to-1 represents a relative probability of a third, or 33.33 per cent.
If a book consists of three horses all at odds of 2-to-1, the total probability for that book is 100 per cent. It is what is known as a "fair book", because if you placed the same amount on each horse, you would break even - neither you nor the bookmaker would come out ahead.
Bookies know this, so if ever they notice the relative probability on a book nudging down toward 100 – or worse, dipping below that figure – they change the odds to make sure the book is profitable. A book with an "over-round" of 10 per cent to 20 per cent is pretty common. Under-rounds should be no more than temporary blips.
Here’s where the internet comes in. Not all bookies quote the same odds on the same outcome. They rarely differ much, but there is enough differential between bookmakers that, if you picked your odds carefully - one from here, another from there - you could quite possibly create your own personal book for an event with a probability of 95 per cent or better.
You could walk round all the bookies in your town centre comparing prices, but the internet makes comparisons that much easier.
Alternatively, if you place your bets at different points in time, the odds may shift sufficiently for you to achieve the same result. On a number of high profile competitions, such as Strictly Come Dancing, the odds on the favourites start off relatively high – 2-to-1 or better – before dropping in the final weeks. As the favourite’s odds shorten, so the non-favourites’ lengthen, which means that if you place money on the favourite early and back the non-favourites later, you should be able to create a position where you cannot lose.
This brings us full circle to "arbitrage" – economist jargon for the practice of taking advantage of a price differential between two or more markets. If you follow the online bookies, identify under-rounds, and then place your money in the right proportions, then this is no longer betting: it is investment and you are guaranteed a return, usually between 5 per cent to 10 per cent of the money invested, on every book.
Beware, though: leave a position uncovered (which is essentially what you are doing when you wait for odds to shift) and you are still taking a risk. You continue to do so until the moment all bets are safely in place: leave out a single option, however unlikely, and again, you are still gambling.
It is of course your money and your choice - but the bottom line is that arbitrage is a perfectly respectable form of investment, while gambling isn’t. Make sure you understand the difference before you place a single penny. ®