This is like gambling in roulette in GTA at Las venturas or the horse racing thing in los santos, bet big win big.
Go to the freakshow tent at the carnival. Make your way through the freaks until you see a wrestling ring, go bet on one of the midgets, I think theres no limit to how mcuh you can bet but i think you can go farther than $500.
If you put it $500, and if your midget wins, you win $1000!
I suggest saving the game at the lighthouse before doing this, because if you lost all your money, you can load it up and wont have to travel that far to gamble again.
A HINT IN A HINT:
If the wrestlers get close, hit the one your betting against!
It will say "violence against children" On the meter but there arent any cops around to bust you.
Credit to IGN.