The Parimutuel Betting System

Parimutuel betting is French for mutual betting where all types of bets are placed in a pool. The good thing about this system is the removal of house takes and taxes. Payoff is distributed accordingly to all those who successfully bets the right outcome.

Mutual betting has been the common system for greyhound racing, jai alai, and on horse tracks. It can also be used in some modified lottery games. Pari-mutuel betting is often regulated by the state, which explains why "off-track facilities" are legal where patrons place their bets (usually on horse racing) even without being in the track. Some countries, however, operates pari-mutuel betting illegally.

The main difference between pari-mutuel betting and fixed odds betting is that the payout of the former is not known until the pool closes. In the latter, payout is already determined when the bet is taken.

To understand this betting system let's use horse racing as an example. Suppose we have eight horses on the track. Before the race begins, bettors place their investments on what horse would win. The betting closes with each horse garnering the following amount of money wagered: Lucky Shallow gets $25; MoonRiver, $20; Stagecoach, $30; Trie Heart, $10; Yellow Stag, $50; Apocalypse, $150; RivaRidge, $100; Top Seed, $75, and Sea Biscuit, $5. The total amount of pool money reached $465. Suppose Sea Biscuit wins. Now, the payout is computed. First of all, the racing commission gets its take - they have a commission rate of 12% only. 12% of $465 is $55.8. Thus, deducting this from the total pool ($465), we now have $409. So the remaining pool would be distributed to the bettors who waged for Sea Biscuit. This computed as $409 / $5, increasing a dollar bet for Sea Biscuit to $81.8. Whoever waged for Sea Biscuit wins a payout of $81.8.

The pari-mutuel betting system was formularized in 1865 by Pierre Oller, who is better known as a perfume maker. Oller devised a system for bettor that provided a fixed profit for a bookmaker friend. Today, with millions of bets that is invested in horse and greyhound racing, a machine that specializes for this calculation is called an "automatic totalisator" or "tote board". This machine was first used in 1913 in one racecourse in Auckland, New Zealand.

The advantage of this system over casinos is that gamblers play against each other and not the house. Moreover, independent off-track facilities, have smaller commission, which then gives higher payouts. For this reason, many countries find this illegal because it doesn't help state revenues.