Odds and probabilities

When quoting results of medical research there’s often confusion between odds and probabilities, but there are stories in the Herald and Stuff at the moment that illustrate the difference.

As you know (unless you’ve been on Mars with your eyes shut and your fingers in your ears), Jeremy Clarkson will no longer be presenting Top Gear, and the world is waiting with bated breath to hear about his successor.  Coral, a British firm of bookmakers, say that Sue Perkins is the current favourite.

The Herald quotes the Daily Mail, and so gives the odds as odds:

It has made her evens for the role, ahead of former X-factor presenter Dermot O’Leary who is 2-1 and British model Jodie Kidd who is third at 5-2.

Stuff translates these into NZ gambling terms, quoting the dividend, which is the reciprocal of the probability at which these would be regarded as fair bets

Bookmaker Coral have Perkins as the equivalent of a $2 favourite after a flurry of bets, while British-Irish presenter Dermot O’Leary was at $3 and television personality and fashion model Jodie Kidd at $3.50.

An odds of 5-2 means that betting £2 and winning gives you a profit of £5.  The NZ approach is to quote the total money you get back: a bet of $2 gets you $2 back plus $5 profit, for a total of $7, so a bet of $1 would get you $3.50.

The fair probability of winning for an odds of 5-2 is 2/(5+2); the fair probability for a dividend of $3.50 is 1/3.50, the same number.

Of course, if these were fair bets the bookies would go out of business: the actual implied probability for Jodie Kidd is lower than 1/3.5 and the actual implied probability for Sue Perkins is lower than 0.5.  On top of that, there is no guarantee the betting public is well calibrated on this issue.