Parimutuel Systems: How Betting In Pools Works

Parimutuel systems are when all bets are placed together in a pool and payoff odds are calculated by sharing the pool among all the winners. This system is used in horse racing, greyhound racing, jai alai, and in many other gambling and lottery scenarios. Unlike other forms of gambling, in parimutuel systems the gambler bets against other gamblers, not the house. The house wins by taking a small portion of the total bets. The stark contrast from other forms of betting is that its impossible to determine how good your selection is when you initially place your bet. This is because the odds are based on the pool.

The system is pretty simple. Every bet is placed. The house subtracts its share. Thereafter, the amount remaining will be divided among the bettors who managed to win. Your payout depends on how much you wagered. For example, take a horse race with horses A through E. You place a 10-dollar bet on horse A and another 10 bucks on horse C. The combined bets on all horses come to a total of 1,200 dollars. Horse A tallied up 200 and horse C a total of 100 with your bets and those of others. The house takes a 10 percent cut, leaving the total pool at 1,080 dollars.

Now the potential payout for each horse can be calculated. This is done by dividing the remaining balance — 1,080 dollars — by the amount bet on each horse. Horse A turns up 5.40 and horse C 10.80. This means anyone who bet on horse C can win 10.80 for every dollar that they wagered. Should horse C win, you receive a 108 dollar payout. Were horse A to win, you receive 54 dollars. Straight away, you notice there is a stark difference in the potential payout of each horse. This is the magic of parimutuel systems: every horse has a different chance of winning, thus the strong favorite gets you a smaller payoff than the lanky underdog if its victorious.

Here’s where we can extend the concept of a parimutuel system to business and stocks. High-risk investments and disruptive ventures have higher payoffs. They are like the underdogs in a horse race. But when they win, the ones who bet on them strike it big. The system reflects the opinion of the bettors. Sound like the stock market? Because stocks behave the same way. Parimutuel systems are aggregate measurements of what the community expects. In other words, they show what people value and what they think will win. Apple is valuable not because of their high-quality products. It’s because other people bet on the fact that their products are high-quality.

Real-life implications of parimutuel systems:

• Horse Racing: in a horse race, wagers are pooled. After deducting a commission, if a particular horse wins, the remaining money is divided among the bettors who wagered on that horse. The payout per dollar depends on how popular the horse was relative to the total pool.

• Greyhound Racing and Lotteries: similar to horse racing, greyhound racing and some lottery systems use parimutuel systems. Participants’ wagers are pooled. Winnings are shared proportionately. Payouts adjust based on the popularity of outcomes.

• Political Betting: online platforms use a parimutuel system for betting on election outcomes, where final odds are determined by the total bets placed by users. The odds represent the collective judgment of the market.

• Sports Betting: some sports betting platforms offer pool betting on events like soccer and basketball matches, where all wagers on a particular result are pooled and distributed. The payout is determined by the ratio of the total pool to the amount wagered.

How you might use parimutuel systems as a mental model: (1) gauge collective wisdom — recognize that the odds in any parimutuel system are an aggregate measure of what the community thinks, and you can use it as a proxy for market sentiment (e.g. if something is heavily bet on, there is widespread confidence in that initiative, such as a widely supported startup); (2) assess risk and reward — consider the pool and the distribution of bets, and use collective indicators (e.g. customer feedback, market trends, investor decisions) to inform your strategy; (3) plan for the worst — acknowledge that rewards in parimutuel systems are never fixed (e.g. by planning for variability via scalable investments or backoff plans in your investment portfolio); (4) leverage behavioral knowledge — use the parimutuel approach as a way to understand current trends (e.g. to price your product appropriately, or to value a company you want to invest in).