When Kentucky Derby handicappers refer to the betting odds – 5-2, 8-1, 50-1, etc. – what do they mean? And how can you filter through all the betting terminology to make a well-reasoned wager on the greatest two minutes in sports?

The odds should not be a mystery. They’re driven by simple math anyone can understand.

These five points should clarify everything you’ve ever wanted to know about how the Kentucky Derby odds are generated:

You’re not betting against the “house” – you’re betting against fellow horseplayers

Once all of the wagers are placed, a fixed percentage of the pool is taken out to fund purse accounts, maintain facilities, pay taxes, etc. The remainder is distributed proportionately among bettors who wagered on the winning horse.

Odds are easy to understand once you know what they actually represent

Consider rolling an ordinary six-sided die—there is a 1-in-6 chance of rolling any given number. If you need to roll a three, you know there’s one chance you’ll land the perfect number and five chances you will not. Therefore, the odds of rolling a three are 5-1. Five losses, one win. The second number in the equation represents the number of times an outcome is expected to occur in a given sample size; the sample size, in turn, is easily calculated by combining the two numbers in the equation. 5-1 odds thus represent a 1-in-6 chance of a particular outcome occurring.

The odds in horse racing are determined by how much money has been wagered on each horse

If 20% of the money (after takeout) has been wagered on Horse #1, Horse #1 has a 1-in-5 (20%) chance of winning. If the race were theoretically run five times, he would be expected to win one and lose four, making him a 4-1 shot.

Comparing perceived odds with actual odds creates “Wagering value”

If you believe Horse #3 has a 50% chance to win, his “fair odds” in your estimation are 1-1, also known as even-money. If the tote board reveals the odds on Horse #3 to be 3-1 (a 25% chance of winning), then you’re looking at a great wager -- the betting crowd is underestimating Horse #3’s chances. On the other hand, if Horse #3 is 1-4 on the tote board (an 80% chance of winning), then you don’t want to place a wager -- the odds are too short, representing an unrealistically high chance of winning.

How are the payoffs determined?

Easy. An 8-1 winner will return eight times the amount you wagered, plus your original stake. If you wager $25 to win on a victorious 8-1 shot, your return will be $225 – $200 (8x25) plus your $25 investment.

Good luck with your wagers!