Parimutuel Betting

#Definition

Parimutuel betting is a wagering system where all bets on an event are pooled together, and payouts are calculated by sharing the pool among winning bettors proportional to their stake, after the house takes a percentage (the "vig" or "takeout").

Unlike fixed-odds betting where payouts are locked at bet time, parimutuel odds change continuously as more money enters the pool. The final payout isn't known until betting closes. This system, invented for horse racing in the late 1800s, remains common in racing and some lottery-style prediction markets.

#Why It Matters in Prediction Markets

Parimutuel systems offer distinct advantages and tradeoffs:

No house risk

The operator takes a fixed percentage regardless of outcome. They don't bet against customers, eliminating the need to manage exposure or refuse large wagers.

Dynamic odds

Prices adjust automatically based on betting volume. Heavy betting on one outcome lowers its payout and raises others. This creates a self-correcting price discovery mechanism.

Simplicity of operation

No market-making or complex matching required. All bets go into a pool; winners split it. This simplicity enables rapid market deployment.

Different risk profile

Bettors don't know exact payouts when betting. This uncertainty distinguishes parimutuel from continuous order book markets where prices are visible before trading.

#Fixed Odds vs. Parimutuel Betting

#Payoff Uncertainty Visualized

Top Line: Fixed Odds (Locked). Bottom Line: Parimutuel (Dilutes as pool grows).

#How It Works

#Basic Mechanics

Total Pool: Sum of all bets on all outcomes
House Take: Fixed percentage (typically 10-25%)
Net Pool: Total Pool × (1 - House Take %)
Winning Pool: Amount bet on the winning outcome
Payout Ratio: Net Pool / Winning Pool
Individual Payout: Bet Amount × Payout Ratio

#Numerical Example

A market asks "Who will win: Team A, Team B, or Team C?"

Betting closes with:

• Team A: $3,000 wagered
• Team B: $5,000 wagered
• Team C: $2,000 wagered
• Total pool: $10,000

House take: 15% Net pool: $10,000 × 0.85 =$8,500

If Team A wins:

Payout ratio = $8,500 / $3,000 = 2.83
A $100 bet on A returns: $100 × 2.83 = $283 (including original stake)
Profit: $183 on $100 bet

If Team B wins:

Payout ratio = $8,500 / $5,000 = 1.70
A $100 bet on B returns: $100 × 1.70 = $170
Profit: $70 on $100 bet

If Team C wins:

Payout ratio = $8,500 / $2,000 = 4.25
A $100 bet on C returns: $100 × 4.25 = $425
Profit: $325 on $100 bet

#Implied Probabilities

You can calculate implied probabilities from pool distribution:

Team A: $3,000 / $10,000 = 30%
Team B: $5,000 / $10,000 = 50%
Team C: $2,000 / $10,000 = 20%

/**
 * Calculates the parimutuel payout ratio.
 * 
 * @param totalPool - Total amount wagered on all outcomes
 * @param winningPool - Amount wagered on the winning outcome
 * @param houseTakePercent - Percentage taken by the house (e.g., 0.15 for 15%)
 * @returns Payout ratio (e.g., 2.5 means $2.50 returned for $1.00 bet)
 */
function calculateParimutuelPayout(totalPool, winningPool, houseTakePercent) {
  const netPool = totalPool * (1 - houseTakePercent);
  
  if (winningPool === 0) return 0; // Edge case: No one won
  
  return netPool / winningPool;
}

// Example: $10k pool, $3k on winner, 15% take
const ratio = calculateParimutuelPayout(10000, 3000, 0.15);
// Result: 2.833... (Pays ~$2.83 per $1 bet)

Note: The house take means actual expected returns are lower than these probabilities suggest.

#Late Betting Dynamics

Final moments before pool closes see strategic activity:

5 minutes before close: Team A at 30%
Large bet on A enters: Pool shifts
1 minute before close: Team A at 40%
Payout for A bettors drops accordingly

Sophisticated bettors often wait until late to avoid telegraphing their positions and moving the odds against themselves.

#Examples

#Example 1: Horse Racing

The classic parimutuel application. At a track:

• Win pool: $500,000 across 8 horses
• Horse #3: $150,000 bet on it (30% of pool)
• Track take: 17%
• If Horse #3 wins: Payout ratio = ($500,000 × 0.83) /$150,000 = 2.77

A $20 bet returns$55.40.

#Example 2: Prediction Market Pool

A platform offers a parimutuel market on "Which movie wins Best Picture?"

• 10 nominees, pool grows over awards season
• Drama X has 25% of pool entering the ceremony
• Underdog Y has 5% of pool
• Betting closes when envelope opens

If Y wins, early backers receive 17x their stake (after house take).

#Example 3: Sports Totals Pool

A market pools bets on basketball total points in ranges:

• Under 200: $20,000
• 200-210: $30,000
• 210-220: $25,000
• Over 220: $25,000

Bettors picking the correct range split the net pool proportionally.

#Example 4: Index Prediction

A market asks where a stock index will close:

• Below 4,000: 10%
• 4,000-4,100: 25%
• 4,100-4,200: 35%
• Above 4,200: 30%

Winner receives payout based on final pool distribution and their share of winning bucket.

#Risks, Pitfalls, and Misunderstandings

Payout uncertainty

You don't know your final odds when betting. A 3:1 payout might become 2:1 if more money flows to your side before close. This complicates strategy.

Late-money manipulation

Large bettors can wait until final seconds to bet, moving odds without giving others time to respond. This advantages well-capitalized, technologically sophisticated players.

House take impact

The takeout (often 15-25%) significantly reduces expected value. Unlike continuous markets where spreads might be 1-2%, parimutuel systems have built-in negative EV for participants as a group.

Illiquid buckets

In multi-outcome pools, some buckets may have very little money. A correct but underfunded bucket might pay extremely well, or might lack enough data for informed pricing.

No early exit

Unlike continuous markets where you can sell before resolution, parimutuel bets are locked once placed. You're committed to resolution regardless of new information.

#Practical Tips

• Bet late if possible: Waiting preserves option value and prevents your bet from moving odds against you. But don't miss the deadline

• Calculate effective odds including takeout: A 2:1 payout with 20% takeout means you're really getting 1.6:1 in expected return terms

• Watch for pool distribution anomalies: Outcomes with disproportionately small pools relative to true probability offer better value

• Consider information asymmetry: In parimutuel systems, informed bettors can profit at the expense of uninformed ones, all while the house guarantees its cut

• Compare to continuous markets: If the same event has both parimutuel and order book markets, compare effective odds after costs

• Size bets aware of pool impact: Large bets move your own odds. Calculate marginal impact before committing significant capital

#Warning: No Fixed Odds

The most critical thing to understand about parimutuel betting is that your odds are not locked in when you bet.

• You bet $100 on Horse A when the odds are 5:1.
• Before the race starts, a whale bets $1M on Horse A.
• The odds drop to 1.1:1.
• You are now stuck with the 1.1:1 odds, even though you bet earlier.

This is why professional traders often prefer fixed-odds markets (like order books).

#Related Terms

• AMM (Automated Market Maker)
• Order Book
• Implied Probability
• Liquidity
• Categorical Market
• Price Discovery

#FAQ

#How is parimutuel different from fixed-odds betting?

With fixed odds, your payout is locked when you bet; a 3:1 bet pays 3:1 regardless of subsequent bets. In parimutuel, all bets pool together and final odds depend on total betting distribution. You don't know your exact payout until betting closes.

#Is parimutuel betting used in prediction markets?

Yes, though less commonly than continuous trading. Some platforms use parimutuel structures for specific market types, especially categorical outcomes with many possibilities. The system works well when markets need simple deployment without complex matching engines.

#Why do horse racing tracks use parimutuel?

Historical and practical reasons. It eliminates bookmaker risk (the track always takes its percentage), handles complex multi-horse fields naturally, and was historically easier to administer before computers. The system has over a century of legal and operational precedent.

#Can I profit in parimutuel markets?

Yes, but it's challenging. The house take creates negative expected value for the average bettor. Profitable betting requires identifying outcomes where the pool underestimates true probability by more than the takeout percentage. This edge is harder to find than in lower-cost continuous markets.

#What's the typical house take?

It varies. Horse racing takeouts range from 15-25% depending on bet type and jurisdiction. Prediction market parimutuel pools may have lower takes (5-15%) to remain competitive with continuous alternatives. Always check the specific pool's terms.