In sports betting, determining the effective value (EV) of a sportsbook is important. The concept of effective value is defined as follows:
“The effective value (EV) of a wager is the loss (or gain) that the house is willing to accept from the point of view of the industry.”
(A bettor puts down a wager, the bookmaker takes the wager, and if the bet wins, the bookmaker pays the bettor back based on the agreed-upon wager.)
The key to understanding effective value is to view sports betting from the point of view of the industry rather than from the bettor’s. Specifically, when calculating the effective value, you must consider the following:
The Odds Of Winning
The first step in calculating the effective value is to consider the odds of winning. These odds are typically expressed as a ratio, with 1.0 meaning even odds (i.e., a 50-50 chance of winning) and greater than 1.0 meaning the favored team has a better chance of winning.
To determine the effective value, simply follow the formula below:
- The odds of winning (OSW):
- (1.0 – SW):
- The effective value (EV):
- (1.0 – OSW)
where S denotes the number of teams favored in the game and W is the number of teams winning. For example, consider the over/under (O/U) line in the NFL. The O/U for the Dallas Cowboys–Washington Redskins game at 12:00 p.m. on 4 November 2018 is listed as 6.0, meaning the Cowboys are 6.0 points favored to win the game. To calculate the effective value, you would enter the numbers as shown below:
- OSW: 6.0 (Cowboys are 6.0 points favored to win)
- (1.0 – OSW): 4.0 (The Redskins have a 4.0 chance of winning)
- SW:
- 1.0 – 4.0: 0.4 (The Redskins have a 0.4 chance of winning)
- EV: 0.4 (The effective value is 0.4)
- 1.0 – 0.4: 0.6 (The effective value is 0.6)
In this example, you earn 0.6 units of payoff (i.e., you will earn 60% of the gross profit on a $100 wager) on a $100 wager. This is because 60% of the bets are priced at 6.0, which is the line for the under.
The Margin Of Take
The second step in calculating the effective value is to consider the margin of take, or how much the bookmaker is willing to risk on a particular wager. The margin of take is most commonly expressed as a percentage, with 100% being the most common number used in practice.
To determine the effective value, simply follow the formula below:
- The margin of take (MT):
- (1.0 – OSW):
- The effective value (EV):
- (1.0 – MT)
- (1.0 – OSW)
Note that the margin of take is different from the leverage used in margin trading. While the margin of take is the amount the bookmaker is willing to risk, the leverage in margin trading is the amount of money the trader uses to enter a trade.
The Time The Bookmaker Is Willing To Wait For A Winner
The third step in calculating the effective value is to consider the time the bookmaker is willing to wait for a winner. This is commonly expressed as a fraction, with 1 day being the most common number used in practice. To determine the effective value, simply follow the formula below:
- The time the bookmaker is willing to wait for a winner (T):
- (1.0 – OSW):
- The effective value (EV):
- (1.0 – T)
- (1.0 – OSW)
Note that the time the bookmaker is willing to wait is different from the time scale. For example, a bookmaker may list the time the bookmaker is willing to wait as “next day.” However, the time scale for the bet may be “this very second.”
Risk Management
The final step in calculating the effective value is to consider risk management. Specifically, you must consider whether or not to use risk management tools (e.g., limits, orders, or stops).
When using risk management tools, the goal is to limit your losses in case of a winner. This is typically done by using the tools in combination with the leverage in margin trading to neutralize any edge the books might have.
How To Calculate Effective Value In Practice
To calculate the effective value in practice, use the following steps:
Step 1: Consider The Odds Of Winning
Consider the odds of winning (i.e., the ratio of the number of teams favored in the game to the total number of teams). If you are looking for an easy way to get into sports betting, consider online betting platforms that provide tools to help you find odds on almost any game.
Before placing a wager, review the odds of winning (i.e., the ratio of the number of teams favored in the game to the total number of teams). If you are looking for an easy way to get into sports betting, consider online betting platforms that provide tools to help you find odds on almost any game.
Step 2: Consider The Margin Of Take
Consider the margin of take (i.e., the percentage of the total amount wagered that the bookmaker will risk on the bet). The number 100% typically serves as a reference point, with the assumption that the bookmaker will require a minimal amount of the wagered amount in order to cover the odds (i.e., the risk) of the bet.
The margin of take is most commonly used in combination with the over/under (O/U) line in the NFL. For example, if you are taking the under (i.e., the Bears are underdogs), the margin of take for the game may be 20%. This means the bookmaker will require a sum of money wager to cover the odds (i.e., risk) of the bet. In this case, you would need to put down $20 just to ensure there is enough money left over for the bookmaker to cover the bet (which would mean you would need to win $40 in order to cover your $20). Alternatively, if you are taking the over (i.e., the Patriots are overdogs), the bookmaker may require a sum of $10 more than usual in order to cover the risk of the bet (which would mean you would need to win $30 in order to cover your $20).
Step 3: Consider The Time The Bookmaker Is Willing To Wait For A Winner
Consider the time the bookmaker is willing to wait for a winner. This is most commonly expressed as a fraction, with 1 day serving as a reference point (i.e., the bookmaker is willing to wait for a winner for 1 day). In general, the longer a bookmaker is willing to wait, the higher the effective value. However, the opposite is also usually true. The shorter the time the bookmaker is willing to wait, the higher the effective value (in theory at least).
The reason why the effective value is usually higher for longer times is that more opportunities exist for a long time interval to go over. For example, if you are looking at a football match that lasts 3 hours, there is a good chance you will witness several goals being scored. In this case, the longer the time the bookmaker is willing to wait, the more goals there are likely to be scored (and the more money you can make).