What's Going to Happen to Prediction Markets?
Why are so many people so concerned about fairness in niche financial products?
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Over the weekend, I read another hit piece about prediction markets. Charlie Warzel’s “A Technology for a Low-Trust Society” tries to make the case that prediction markets are bad, relaying familiar anecdotes of insider trading and markets that settle on undesirable events like war.
Warzel also reaches the conclusion that “they’re specious forecasting tools” while relying on an anecdote concerning the Polymarket “Will Jesus Christ return before 2027?” market and a derivative market that he alleges introduced an incentive to manipulation. From this, he reasons that “the markets don’t always reflect what people think will happen as much as they reflect what people think other people think will happen.”
Whatever the merits of these arguments, and I think it is beyond tired to argue them, the more interesting question to me is “why are high-profile journalists writing about these?” Why have a certain set of journalists, in unison, drawn the conclusion that prediction markets are bad and the masses should be warned.
Sure, they are growing in popularity, with both Polymarket and Kalshi reportedly eyeing $20 billion valuations on their next raise, and usage increasing. Nonetheless, they are still relatively small components of the global economy with well-established positive externalities and understood risks. What is the rub?
Near the end, Warzel pivots the article to a discussion of what he calls the “depravity economy” and a parade of horribles that he speculates will emanate from it.
As the depravity economy grows, it will break whatever trust we have left in one another: If prop bets spur athletes to play differently, this poses an existential threat to the integrity of live sports. If people believe that anonymous government insiders are profiting off of classified information, what reason is there to trust anything that the administration says?
When I see rhetoric like this, I think of something different. I think about incentives. A major feature of contemporary life is the richness and availability of highly dopaminergic stimuli. App developers long ago cracked the casino formula for making usage just rewarding enough, and just uncertain enough, that it will reliably bring users back for more.
All media is a zero-sum competition. There are a near-fixed number of people on earth, a fixed number of hours in the day, and each person can only focus on a single thing at a time. So each instant of TikTok must take time from something else. This is very challenging for written media, which is not inherently dopaminergic, and now must compete with these purpose built behemoths.
One strategy that works is fear. The human limbic system is the set of brain structures that comprise emotional responses. It can be reliably activated by stimuli that provoke fear, and once active it produces focus. This means that for a journalist, if you can find a bogeyman that people are afraid of, you can get attention, and in media that is your next meal.
Prediction markets, particularly when framed, as Warzel did, that they contribute to a society-wide “erosion of trust,” appear to be salient in this way for certain readers.
This struck me as interesting recently, because while most media around prediction markets has earnestly emphasized perceived problems like market manipulation, insider trading, or death markets, I don’t see any of these as a long-term threat to the industry. Instead, the real issues, which aren’t covered anywhere, are the opportunistic uses of the markets as convenient foils by journalists and politicians, and money. More on that next.
Kalshi v. “Fairness”
I have to tell you the truth, I’m really tired of writing about the litigation surrounding prediction markets. It’s been years now, and thinking back to the first article I published (with Matt Homer) in CoinDesk in September, 2024, everything was fresh and interesting then. Kalshi was breaking through and opening up new markets. Then Crypto.com opened the sports frontier, and anything seemed possible.
But then the prediction markets won, and now the litigation is just a slow erosion of that victory. The truth is, you can use legal prediction markets approximately everywhere. They won, and their various opponents lost. But the States realized too late that prediction markets were a raw deal for them, and went to war.
Every day on X I see Daniel Wallach making a new post about some district court decision going one way or the other.
And while each of these subsidiary actions is interesting in a sort of transitive constituent way, in the broader sense of the future of prediction markets in the United States, they do not matter. There is a panel of nine judges in Washington D.C. that is going to eventually determine whether prediction markets based on sports and entertainment are legal, and preempt state enforcement, or are illegal and do not, and every single other decision between now and the day that the Supreme Court does eventually rule is just noise. Plain and simple.
It is the fact that the law is so clear1, in my view, that makes the ever escalating chatter over the markets in public forums so interesting. Charlie Warzel is only the most recent example. I have seen endless think pieces about how gambling or prediction markets may be bad for consumers, how they could be manipulable, or vectors for insider trading. Generally, I think these issues are overblown on the merits. These are markets like any other.2 But the same old opportunistic saw drives them.
Fairness is a base emotion. If you take two dogs and give one a sausage and the other nothing, it will bark at you. That is because fairness lives in the ancient recesses of our hind-brain, and this gives it a direct tap to the limbic system. When people hear that prediction markets are manipulable, or that they host insider trading, it sets off the fairness button in the back of their skulls, and that moves their eyeballs. And eyeballs are power.
Politicians and journalists focus on “fairness” in prediction markets because they have found that perceived unfairness provokes a strong response in their constituents, and that allows them to control you.3 Journalists want clicks. Politicians want donations and votes. And the good ones know that the best way to do this4 is to produce content that activates an emotional response in human brains. But this issue doesn’t matter. It is not the reason that politicians care about prediction markets, they would happily sell each constituent one-by-one down the river to Hades if they thought it would preserve their status. It is also not the issue that will ultimately determine whether these markets survive. It is just a farce, playing out alongside the real battle, to trick you into clicking links and supporting politicians who hate you.
Here is what actually matters. Money. Power. That is the key to understanding this fight.
States Will Always Hate Prediction Markets
It is a little glib to say that fairness in prediction markets doesn’t matter. Of course it is bad for markets not to be fair. There is a common argument that the positive externality of fidelity to truth is increased by insider trading, and that may be true. It may even outweigh the negative effect of unfair markets to retail, but it doesn’t mean the unfairness isn’t bad, that is all it is.
This is why the securities laws prohibit insider trading, enforcement facilitates trust in capital markets, which, the theory goes, is essential to their function. This might be true, there is definitely evidence that there was a lot of nonsense in 1920s stock trading, but the conclusion does not necessarily follow for prediction markets.
More importantly, though, the reality of fairness has no explanatory power of what is actually happening in the prediction market space. It is not, and will never be, an important issue that drives anyone with power to make a decision about prediction markets. Those reasons are, (i) opportunism as described above, and more importantly (ii) money. Let me explain.
Historically, state gambling was illegal. But on May 14, 2018, the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association, 584 U.S. 453 (2018) legalized state sports gambling in the United States. It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment. This created an important source of state-controlled revenue, and created a new locus of power in state regulators by locally empowering them to oversee substantial gambling markets.
Prediction markets’ “crime,” the reason that so many states have pursued and will continue to pursue action against them until they win or are stopped, has nothing to do with the merits of these markets. As I have written many times, on the merits prediction markets, however imperfect, are clearly better than traditional gambling markets.
But prediction markets are federally regulated under the CEA, and the CEA gives exclusive jurisdiction to regulate such derivatives to the federal CFTC. That means that if they come to predominate, states will not be able to control them, and more importantly, may not be able to tax them.
Tens or hundreds of millions of dollars of revenue from states is no joke. That is not something that anyone will ever let go. You cannot blame states for value maximizing.
But you can’t give them the moral high ground either. And that is my real point. Whatever journalists and politicians would have you believe, the prediction market fight is not a story of a knight on horseback coming in to rescue the public from themselves. It is a fight for a knife in the mud.
My best prediction is that entertainment and sports prediction markets have a 70% chance of surviving. That assumes that the forthcoming CFTC NPRM on prediction markets liberalizes the treatment of these markets, and that the question of preemption eventually accedes to the Supreme Court. Once it gets there, all that counts, through all the sound and fury, is counting to five.
Anything that tells you anything different has a motive.
Until next week.
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And by clear here, I mean that the core issue is already well known and there is little question that the Supreme Court is the only authority that can ultimately decide it.
Although some concerns like the incentives to, e.g., throw rubber penises on the court at WNBA games do strike me as perverse, if not necessarily requiring government intervention.
And influencers, and social media platforms, etc.
Other than being good looking.
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Nice write-up Aaron. It is clear that you see this as a preemption fight, but that’s only because of what we call litigation sequencing. Once you zoom out and look at the whole picture, the dynamic changes completely. What’s happening is much more concerning. Our full response here:
https://www.fullcourtpress.io/p/concerned-for-this-country-a-response-to-aaron-brogan