Economists have long pushed for prediction markets. The reality is not what they’d hoped for

 

Kalshi is the leading prediction market platform in the US.

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New York —  

Long before the founders of Kalshi and Polymarket were even born, a handful of economists were getting amped about a novel approach to dealing with one of humanity’s more egregious shortcomings: We’re bad at predicting the future.

Maybe, the thinking went, the free market could help. (This was the late ‘80s, after all, the heyday of Reaganomics, Alex P. Keaton, the twilight of the Soviet Union — what couldn’t capitalism fix?)

And so the modern prediction market was born.

But nearly 40 years into economists’ obscure academic project, the booming industry they helped inspire — a multibillion-dollar business fueled largely by sports betting — looks very different from what they envisioned.

Laws designed to strictly control gambling or gambling-like behavior made the leap from academia hard. Frustrated by the hurdles, 19 economists in 2008 laid out their pitch in a paper in the journal Science, titled “The Promise of Prediction Markets.”

With “virtually limitless” applications for businesses and policy makers, these new forecasting tools “should be freed of unnecessary government restrictions.” Regulators, they argued, should allow contracts on any economically meaningful event — elections, environmental risks, monetary policy, etc.

Since then, we’ve gotten event contracts for just about anything. The markets aren’t perfect crystal balls, and crowd wisdom can be misleading, but they’ve had some notable wins, like when Polymarket bested the leading polls and pundits to call the 2024 presidential race in Donald Trump’s favor. And traders have consistently anticipated key economic data points, like the rate of US inflation and interest rate decisions from the Federal Reserve.

But when those 19 economists wrote their dream scenario, they did so with plenty of guardrails in mind.

Sports betting has soared in the US since 2018, when the Supreme Court overturned a federal ban.

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The markets would “presumably not include contracts on the outcomes of sports events.” And the economists made the case for capping the amount any one person could wager to a “modest sum, perhaps something like $2,000 per year” (about $3,000 in today’s dollars).

But with sports betting exploding on prediction markets, and with virtually no cap on wagers, things haven’t worked out quite how they’d imagined.