The Conversion of Money Lines into Win Probabilities: Reconciliations and Simplifications
45 Pages Posted: 9 Sep 2015 Last revised: 13 Feb 2018
Date Written: August 1, 2016
We contribute to the literature on money line betting markets by investigating the relationships between the various methods used to derive subjective win probabilities from money lines. We show that, although the seven methods described appear to be unique, they actually share many common assumptions and that, surprisingly, they reduce to three distinct estimates of bookmaker commission and subjective win probabilities. We also show that among the three distinct estimates, one is biased when money lines suggest a very heavy favorite in a particular sporting event. Thus, it is important to consider the assumptions for each method when deciding which to use in a particular context. Two empirical examples demonstrate how a market inefficiency, such as a long-shot favorite bias, should influence the choice of methodology.
Online appendix is available at: https://ssrn.com/abstract=2919597
Keywords: betting markets, subjective probabilities, market efficiency
JEL Classification: Z23, L83
Suggested Citation: Suggested Citation