Pari-mutuel wagering systems are used for almost all horse-race and dog-race betting, as well as for betting on jai alai games in the United States. The system allows for player-banked betting with all bets pooled and prizes awarded from the pool. Winning bets on other racing events are also determined on a pari-mutuel basis. In Japan, the system is used to award prizes to winners of wagers on motorboat and bicycle races. In Oregon, sports betting card bets are distributed to winners on this basis also. The state permits players to pick four winners of football games on a single card. The state takes 50 percent of all the money played and then divides the remainder among those who picked four winners. The California lottery actually uses a pari-mutuel system for its pick-three numbers game in order to avoid exposure to high risks because many players’ favorite numbers are the same favorite numbers. Whenever there is a pari-mutuel system, the organization running the system takes a percentage of the pool before bets are redistributed from the losers to the winners.
Although the pari-mutuel system is built on quite a simple concept, it was not a part of the betting fabric until late in the nineteenth century. It was invented in Paris, France, by Pierre Oller in 1865. Scarne’s Guide to Casino Gambling (Scarne 1978) suggests that Oller acted in response to a bookie who quoted odds on each horse before a race, but was not very good at his trade and therefore often suffered losses because too many bettors placed their wagers on the winning horses. The bookie asked Oller if he could figure out a way in which the bookie could take bets without ever having to suffer losses – the gambler’s eternal dream. Oller found a way: take bets but announce odds only after all bets were taken. Oller invented what became known as a totalizator. His tallying machine would add up all the bets on each horse, compare them, and then determine odds. All the odds could then be cut a set percentage to ensure a profit for the bookie. Soon a ticket machine was added to a totalizator device, and with the passing of time, more advanced machines made the bet-taking process more efficient and allowed tracks to consider changing their betting structures to the pari-mutuel system. As they did so, the tracks themselves became the operators of the betting on horse racing.
It is suggested that the system became known as pari-mutuel as a shorter reference to Paris Mutuel. The totalizator was first used at North American tracks in 1933; as horse-race betting was revived in more and more jurisdictions during the 1930s and afterwards, the pari-mutuel system totally displaced other betting systems.
A simple example of how a pari-mutuel wager works might find that all bettors wagered $100,000 on a race. Horse Surething attracted $30,000 of the bets in the eight-horse field. The track calculated all bets, totaled them, and then subtracted 18 percent as its fee. Actually this 18 percent, or $18,000, was divided three ways – $6,000 to the government as a tax, $6,000 to the track owners, and $6,000 as a prize for the winning horse. Sure enough it was Surething. All the people who bet on Surething were winners. Together they shared the $82,000 that was left in the pool of betting money. For example, if 500 people bet $100,000 on the race, and of these 50 bet on Surething to win, the 50 would share the $82,000 prize. They would share it in proportion to the amount they had bet. If collectively the 50 persons had bet $50,000 on Surething to win, each $1 they had bet would be rewarded with a prize of $1.64. A typical $2 bet would receive a return of $3.28, and a person who made a $1,000 bet would receive $1,640 in return. In actuality the $2 bettor would receive $3.20, because the track always rounds down to the nearest ten cents. The eight cents is called the breakage. Money from breakage is usually assigned to some party that takes money from the 18 percent (the track, horse owners, government).
In racing there are many kinds of bets (see Horse Racing). There are the straight bets – betting that the horse will come in first (win), first or second (place), or first, second, or third (show). There are also exotic bets, such as the daily double (winners of the first two races) or the exacta (picking the first-place and second-place winners in a race). For each kind of bet – show, exacta, daily double – there is a separate pool, and winners are paid from that pool alone. The betting arrangements can get very complicated, but modern computers can calculate results instantaneously, whereas in the past, several minutes would pass before a winner would know how much the winning prize was.
In the past, offtrack betting houses – such as the casinos in Las Vegas – would not participate in the pari-mutuel pools. Rather, they would simply pay the track odds and keep the takeout percentage (18%). In doing so they would put themselves at risk, as they were running a banking game. Now all participate with the tracks in the pari-mutuel system, as the offtrack bets are thrown into the same pool as the track bets. In exchange for being able to avoid the risk of being a house banker, however, the offtrack facility, such as the Las Vegas casino, gets to receive only a very small portion of the action wagered at their facility – 5 or 6% rather than the theoretical 18 percent they would have received if their bettors made wagers in the same proportion as those at the track.
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