Monday, May 17, 2010

Lottery Players Bear Parimutuel Risk (Lottery Trivia Answer 2010-09)

Last Week's Trivia Question #2010-09 was: 
The winning prize amounts of many State lotteries, such as Pick 3 and 4, are paid based on parimutuel system while other States have fixed payout prizes. To help players better understand what this means, we asked:
  • What is a parimutuel Lottery Payout?
  • How does it differ than fixed payouts?
  • Are parimutuel payouts higher or lower than fixed payouts?
Based on our research and experience, we have found that:
  • A parimutuel payout is one in which a fixed percentage of the amount received is paid back to the players. It was invented by Joseph Oller in 1867 and is typically used in race track betting.
  • This differs from a fixed winning payout in that the amount of a winning ticket fluxuates depending upon the number of winning tickets. For example, States such as North Carolina and Texas pay a flat $250 for a straight combination $0.50 winning ticket. However, New Jersey, California, and others pay the Pick 3 winners based on a parimutuel share of the winnings.
  • Parimutuel payouts might be much higher or lower than the corresponding fixed payout. A Pick 3 parimutuel ticket may pay as little as $75 or as high as $425 on the same $0.50 ticket.
In our opinion, the primary difference is: Which Party bears the payout risk?
  • In the fixed payout system, the State bears the risk of having to payout more than it received. To counterbalance this, the State get to retain the implied profit when few payouts are required.
  • In a parimutuel environment, the player bears the risk because: the payout odds differ from number to number; and, the odds are not shown to the player.

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