What are sports odds based on?

I've recently become interested in betting in sports. I'm studying math, and this is (so far) just a statistical exercise to me. I've been quite successful too, betting on tennis and basketball. To all tennis fans out there, I can say tennis appears to be 100% predictable. ;-) But in basketball, the odds has sometimes failed to predict the winner, even when the outcome seemed certain from looking at the odds. This raises the question, what are the odds based on?

I've noticed that different betting houses have different odds, but the difference is usually slight. I've also noticed that the odds change in the hours before the match. This seem to imply that betting houses has an initial idea about how the match will end, based on relative frequency (history), and then adjust the odds slightly depending on how people bet.

I'm interested in what kind of statistics the betting houses use for their initial prediction. Is this a trade secret, or can you calculate the same odds yourself with a standard method? In the financial theory, you say that the market is "effective," meaning that everything that is publicly known about a company is reflected in its stock price. Can you say the same for odds?

I suspect the odds are "polluted" with herds of fans always betting on their favorite team, without consideration of the likely winner. I suspect that's why I lost 2 matches betting on LA Lakers, despite them being the favorite team and the likely winner. They may have more fans betting on them (because LA is densely populated), but they play like crap.

Hoping you people can confirm, correct or add to this. :-)