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The magic behind the gamble

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Published 1st November 2018.
Actuaries could be trading their life tables for betting slips but how is this possible? Fraser Albiston provides us with a rundown on the wizardry behind the numbers.

While training to become an actuary, it is obvious that a knowledge of probability and statistics is crucial to joining the profession and whilst around 70% of actuaries work in finance and insurance, there are many other potential ways to put those professional skills to the test. With around 31% of people in the UK participating in gambling within the last 4 weeks (not including the national lottery), the gambling and betting industry makes a large amount of revenue each year. Last year, there was a recorded total of £13.9bn in gross gambling yield in the UK gambling industry according to the gambling commission. So how do gambling companies derive the odds to make such a return?

Looking at sports betting shops or bookmakers such as William Hill, Ladbrokes and others alike. These companies usually have a team of employees called risk analysts or “odds compilers” who look into many variables to examine what the potential outcomes are likely to be. For example, when betting on a certain football team to win, risk analysts would investigate variables such as how well the team is playing, if any key players are injured, the influence of the crowd and the amount of money that will potentially be placed on a certain side winning to name a few. These factors are considered and the odds are calculated with an additional percentage added to certain events to skew the odds slightly in their favour to make a profit. Typically, a bookmaker wants to make a profit between £1 - £20 for each £100 gambled. In addition, most money gambled will be placed on a favourite to win, and if that team fails to win, the bookmakers make a larger amount of profit.

There are some significant similarities between the financial work done by an actuary and the risk analysis done by bookmakers. Some actuaries have even used their analytical skills from their degree and workplace to become researchers on the betting market. Associate actuary, Dr Dominic Cortis, is one example of an actuary who has become a researcher in sports analytics and betting derivatives. He points out that a model for both financial and betting markets needs a carefully selected set of assumptions to estimate likely events that may occur. The models built for sports betting are aimed to identify when a betting opportunity will likely be profitable. Models do this by analysing and assessing how well a team will perform. Furthermore, actuaries are skilled in presenting technical information to a less experienced audience which is useful to work out biases in the betting population.

To conclude, applying actuarial skills and knowledge to sports betting is an interesting concept in which models can be tested without the risk of betting real money. There are also many other areas within the gambling industry where an actuary can gain employment. Michael Shackleford, is an American actuary who is well known for researching and analysing the mathematics behind casino games. He has made a name for himself by creating strategies on how to make the most return from casino games. This shows there are other potential routes for an actuary to challenge themselves and to break away from a traditional financial background.