The Opportunity Cost Of A Bet

Whenever I bet on anything I always calculate what percentage chance is implied by the odds available. 

Once I have done this, I ask myself: 

Is there a better chance of this outcome happening than implied by the odds?  

This is partly how bookmakers calculate the odds they offer.

You can read more about bookies on the understanding bookmakers article.

Percentage Chance 

If the answer is yes to the above question then the bet has passed my first test. 

For example, if the odds on an outcome are even money, and I think that there is a 60% chance of that outcome happening, then I will take the bet.

If I only think that there is a 40% chance of it happening, then I won't. 

But this is only the first test that my bets have to pass. 

If a bet passes the first test, I ask myself another question.

Is the chance of this outcome happening, greater than the chance implied by the odds, by enough to make it worth my while betting.

This might sound like an odd thing to say, but it is based on the fact that there are costs associated with betting, apart from the stake. 

Any profit returned in addition to the stake has to be sufficient to cover these extra costs as well, before a bet is really worth making.

The first cost of betting is time; every bet made takes time to put on. 

Some people might travel to a betting shop to put a bet on, others might just do so online, but either way some time is taken up on the actual putting on of the bet.

However, with the exception of people who are either very lucky or very likely to lose, the biggest amount of time is spent in researching what to bet on. 

Imagine there was a football league where a punter was 100% certain that over the season he could make a profit on average when all bets were taken into account and he knew that it would take him one hour a week. 

Obviously, if that average profit was 50%, this would be a no-brainer, he would obviously want to do it.

But what if the profit was 0.5%?

Perhaps then, unless he had the means to put on huge amounts, it probably wouldn't be financially worth his while betting on this market at that average profit level.

Another cost to betting as well as many other things are what economists call “opportunity cost”. 

What this means, is if you are having a £50 bet on one thing, you can't be betting on another thing with that £50. 

From the point of view of a punter, even if he wins, he is it without the money for the time he places a bet until the time the bet is settled. 

Normally the only bets that would fail this test are ones at very short odds. 

Imagine I want to have an exposure of £100 on football on a Saturday and have five bets that I think are worth making, in the sense that the probability of winning is greater than the odds imply.

If for example, three were between 2.00 and 2.50, and two between 2.50 and 3.00, then I would probably put £20 on each. 

These are all worth making in my view because I think that the odds are longer than they should be.

If one of my five bets was priced at 1.15, two between 2.00 and 2.50, and two between 2.5 and 3.0, then I probably wouldn't bother with the 1.15 bet,

I would stake £25 on each of the other four. The return on the 1.15 bet is so small that I would rather use the money to increase my stakes on the other bets.

Looking at this another way, perhaps I have £10 to bet and I don't have the internet.

If the only bet I can find is at odds of 1.15, and it costs me £1.50 to get to the betting shop and back on the bus, then there is clearly no point making the bet; even if I win, I am only winning enough to pay the bus fare.

The opportunity cost of a short term bet is only really a factor if the odds are quite short. 

If I am betting £20 on a football result, there are limits to what I could do with that £20 for the 2 hours I am going to be without it.

If I am looking at ante-post bets on outcomes that happen months in the future, then there is another thing to consider. 

If I make a £20 bet today, knowing that even if I win I will not get the money back until May next year, then I have to consider that there could be other things I want to do with that money more than effectively lend it to bookmaker.

Perhaps I am lucky to have a non-risky investment that I could make, where I get for example a 1.5% return. In this case, I must deduct this 1.5% return from the return I will get for the bet and ask myself if this bet still worth it.

Even if I don't want to invest my money in a traditional investment, perhaps I just want to use the money for short term bets. 

Of course, if I don't have a positive average return on my bets, then I will lose the money (in this case bets are just a service that I enjoy but am paying for, and any comparison with an investment is futile), but if I am confident of making a small average profit on my bets, then the cost of a long term bet might be quite high. 

Imagine a punter who expects to make average profits of 2% on each of his short term bets. 

If he does this over the following 22 weeks (until May next year) he would expect to have profited over 50% from the accumulated bets by then. 

So if he has an opportunity to make an ante-post bet on the winner of the Premier League, for example, he needs to take into account the 50% profit he will lose out on by not making 22 week's worth of short term bets with the money, when deciding if his bet is worthwhile.