A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game.
The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.
Somebody poor grunt who chose to earn a living by laboring (which has proven to be much less effective than being born with money) will be putting fuel in the bombers and thinking "I could just make an anonymous bet..."
It's a national security issue.
We saw this with the Venezuela attack. A flurry of trading and someone made $400,000 for placing a bet mere hours before the "surprise" attack. https://www.pbs.org/newshour/nation/a-400000-payout-after-ma...
With the prediction market, there is a financial incentive for people on the opposite side of the bet being motivated to uncover the malfeasance.
The prediction market is the mechanism by which this happens.
It only takes one person to pick up 40 pizzas, after all. Perhaps they could look at time estimates for a new order as a better indicator, if such an API exists prior to ordering.
The pizza index is specifically about late-night pizza orders, when presumably most of those restaurants are closed (though some do appear to be open 24/7).
The trade was going long the 3x Oil&Gas ETFs the trading day beforehand. There was huge buying for absolutely zero perceived reason...then boom we just straight up kidnapped Maduro.
There exists "alternate data", some companies monitor all kinds of stuff, satellite pictures, etc, some of these companies surely saw the inevitable asset positioning just before such a big attack (150 planes).
Just like the Ukraine invasion was first visible on Google Maps as traffic jams !!! at the border at midnight
https://www.washingtonpost.com/technology/2022/02/25/google-...
https://finance.yahoo.com/news/trump-jails-venezuela-leaker-...
Anyone with a security clearance making bets like this is not a smart person.
No beleives MAGA nuts are trading experts.
By contrast, making public bets based on classified information that you are not authorized to publicize is a simple and relatively direct breach of laws regarding the handling of classified documents and state secrets.
1- Making a bet with privileged information. 2- Creating the event and making the bet.
2 would be a war crime, 1 would be a probabilistic leak.
Trump claimed they didn't want to pass through congress because they leak, and there were no leaks about the event. But if any personnel made a polymarket bet, that would constitute a leak. It wasn't acted upon, but if personnel continues to leak information in this manner, it is possible that an adversary will eventually listen to this signal, and that it was just ignored because it is too fresh.
This analysis would also make it clear why it would be immoral to participate in such markets as a civilian. Because if it is your country you might be compensating an insider for information, benefitting the enemy. And if you are not, you might be harming the enemy, but you would be an unlawful belligerent.
But most of us understand that prediction markets aren't that, no matter what Robin Hansen said when he was helping invent the modern incarnation of things like Polymarket and Kalshi. They're gambling venues, and we have "Nevada Gaming Commission"-style concerns about fairness. To me, the next logical step is to say that they should be heavily regulated, but in the era of DraftKings, that seems off the table.
A classic example is the color of the Queen's hat at Royal Ascot.
https://www.upi.com/Odd_News/2008/06/20/Bets-placed-on-queen...
https://news.williamhill.com/horse-racing/queens-hat-betting...
And the relevant one from 2005 - https://www.foxnews.com/story/hat-trick-upsets-british-booki...
> But alarms were raised Thursday morning, hours before the royal appearance, when a run of bets for brown started coming in, displacing light blue as the favorite.
> "Nobody was backing brown at all and suddenly everyone wanted in on it," Paddy Power (search), owner of the eponymous chain of betting shops that inaugurated the hat bet 10 years ago, told The Times.
> Power's odds on brown went from 12-1, to 2-1, to even and finally to 8-11 before he yanked the bet at 11:30 a.m., 2½ hours before the Queen was due to show.
> "Someone must have been in the know. We laid 50 pounds at 20-1 and 200 pounds at 10-1 and some smaller bets," David Hood, spokesman for rival betting chain William Hill (search), told the Daily Telegraph.
> ...
> When Elizabeth II finally made her appearance, she was indeed wearing a brown hat with cream trim.
> "Somebody has made a tidy sum," sniffed Hood.
> Both he and Power, who estimated his firm lost about 10,000 pounds, or $18,000, suspected palace insiders.
All without traceability or secret drops or whatever.
POSIWID
Well, that's not an argument against prediction markets.
They could have exactly the same amount of traceability as regular financial markets, and still work well as prediction markets.
Everyone can make up a silly purpose.
Against POSIWID: https://www.astralcodexten.com/p/come-on-obviously-the-purpo...
I have always considered the following to be basically synonymous:
* In the absence of info, consider the intended output of the system to be what it is measured to be
* The output of the system is best determined using observation vs reasoning
Most of the examples there are moreso about two systems colliding. Yes, the purpose of the military is to disable the enemy and by god they are disabling a lot of each other so much so that they don't seem to be doing much else.
Except the bus system, in which the purpose is indeed to turn fuel into exhaust, because the busses move whether they are full or not. The purpose of busses is to drive around, and it so happens people like to use them. If the purpose of busses was to shuttle people around, it could be done several other better ways.
If the purpose is to gamble, it can be done many other ways. This system seems purpose-designed (or purpose-emergent) to coax out secret information in the form of large bets.
What are you basing that one? And how is this supposed to work?
If you are an insider the incentive is to trade as soon as possible, lest some other insider beats you to the punch, or some conventional leak (or investigative journalist) spoils your party.
This is easiest to see, when there are multiple unconnected insiders: the first to trade wins. But even if you merely suspect another insider might exist, you have an incentive to trade first.
> And that's assuming that you can distinguish an insider from someone lying for the sake of market manipulation.
That's exactly the same as any other noise trader in financial markets, yes. Nothing specific about insider information.
E.g. there's a 1-to-1000 bet for $1m today on Trump falling down the staircase. So markets read this and go crazy, buying up the stock. The next day, nothing happens and the markets go down. But somebody could have made billions betting on that.
Just because there's a small bid for 1-to-1000 on market, doesn't mean you can buy billions worth of contracts at that price.
I'm sceptical that prediction markets uniquely enable this. Like, if you want to bet on U.S. airstrikes in the short term, you could always buy oil options (or short exposed companies). If you're in for the long term, you're buying something that benefits from cheaper gas, e.g. an additives company.
See https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_...
Insider trading is illegal. And for trades that aren't technically insider trading, often having some information ahead of time isn't as useful as it seems. Markets are known to react unpredictably to news; sometimes they move the opposite way from what you'd think, especially over the mid-long term, and there are many other influences on the price.
With a prediction market though, if you know what'll happen in the world, you know exactly what you'll win in the market.
Only in some markets and in some jurisdictions and some of the time.
Eg until fairly recently 'insider trading' in commodities wasn't anything you were punished for in the US.
You can already short sell a company and then cause trouble for them, eg with an anonymous phone call of a bomb threat or whatever.
Typically, the authorities will catch you, because they check suspiciously lucky traders. They can do the same with prediction markets.
> A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game.
The outcome of a sports game isn't exactly important in the grand scheme of things. And no one is forced to bet on sports to hedge their harvest against the weather or something like that. It's all entertainment.
> The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.
So? Don't participate in these particular bets then?
It also makes sense for the people voting: by betting against the outcome they want, they end up either a) paying for getting things their way, or b) getting consolation payoff if the decision makers pick the undesired choice.
It turns out that play money prediction markets are just as good as the real money ones.
Imagine a jury or judge start betting on their own cases? $500 might not sway them, but $200,000 bets coming in from villain/victims' relatives might and they thereafter decide to enter the market and also influence (or force) a legal outcome. So it can be used as a stealth form of bribery if external parties seek to make it profitable for insiders to effectuate an outcome. So at what point should the bet switch over to play money?
And what happens if all that play money can one day be redeemed into a new coin?
So with the rise of prediction markets one can predict a subsequent rise in surveillance. Can you even flag a bet on PolyMarket?
"Khamenei out as Supreme Leader of Iran by March 31?" https://polymarket.com/event/khamenei-out-as-supreme-leader-...
There's almost $7m in volume there. But what if multiple Israel-aligned groups coughed up say $250m and bet "no" then that's like a bounty, right, for someone in Iran to effectuate a yes on the ground? Khamenei himself could step down too after involving himself in the bet and then use the proceeds to ensure his ongoing protection. I don't know. PolyMarket or PolyPay?
It's interesting how those markets avoid any language like "death," I assume to not give the obvious appearance of an assassination market, though death seems covered by "is prevented from fulfilling his duties".
if you're not the person-in-complete-power, your bet is really likely to be 'rigged' against you
I'd rather play dice or buy lotteries
This is quickly becoming the point of them, at least insofar as they are enjoying an extremely favorable regulatory environment courtesy of the Trump crew.
> During the 2024 general election campaign, allegations were made that illicit bets were placed by political party members and police officers, some of whom may have had insider knowledge of the date of the general election before Rishi Sunak, the Prime Minister at the time, publicly announced when it would be held.
> ...
> In April 2025, the Gambling Commission charged 15 people with offences under Section 42 of the Gambling Act 2005, including Russell George, Tony Lee, Nick Mason, Laura Saunders, and Craig Williams. Trials are not expected to begin until September 2027 or January 2028.
But for big events/talked about stuff/etc ofc this is not true.
And I was told I was crazy.
Hahahahahahahahahaha. Nope I was right.
OK, and? The market is just paying them to make information about their decisions public.
If "Politician XYZ takes the day off and sits on the couch" were paying 100-1 odds, it wouldn't be such a big drama (although, again, the existence of the bet would still impact their behaviour)
This also isn't a theoretical issue that may happen - it dissapoints me that very few people know this but - on October 10th when BTC fell from $122k to $104k because of a trump announcement, someone created a short position 30 minutes before Trump announced 100% tariffs on Chinese imports and profited $200M USD.
In the context of legislating prediction markets or not, sports is not a concern at all.
Whether it's a net positive or negative for important shit like war and corruption, we'll see, but if it helps in the important stuff, but damages sports, sorry bud.
Second - even if you are not one of the millions of Americans that give a shit about sports, there is still a massive fraud implications just by the existence of crypto prediction markets. All it takes is one bad call to changed the outcome of game. The Superbowl last year had over $1 billion wagered on it.
For example, one of the top trending ~~bets~~ markets right now is on whether Miami or Indiana will win the NCAA football championship tonight. You can either take "Yes" on Indiana at 74c, or "No" at 27c, or you can take "Yes" on Miami at 27c or "No" at 74c. Or, there's another potential outcome - you can also bet on a tie at 10c yes/91c no.
Is this research suggesting that an optimistic Miami fan can somehow get a better return by buying "No" on Indiana than a "Yes" on Miami?
Why is Kalshi structured with these yes vs. no options for all outcomes?
Edit: it looks like the tie market is only for if the game is tied at halftime, which makes much more sense
it's basically how they do margin. otherwise you wouldn't be able to sell / post asks without already having a long position. for kalshi, it's actually one single security in the background they just present it as two order books (but really it's one). for polymarket, they are two distinct products that trade separately, and technically could have arbitrage between them. although in practice they're normally priced correctly to sum to 1 (or 1.01)
I have to say I was this huge fan of the idea and I didn’t anticipate it would happen like this.
And then I go back to the home page, and see all the rabid sports fans, and realize that these bets are not being placed by deep thinkers.
https://www.cookpolitical.com/analysis/senate
Portrayal to the contrary is mostly due to non-experts pumping their own ego, or deliberate media spin.
So it would be interesting to measure the inefficiencies of various bets vs the total market value in that bet.
e: Although full disclosure, I did not pick apart the entire paper. Maybe it's buried in there.
i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.
I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket.
But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed?
In any case: Thanks for a very interesting paper!
I'm glad you enjoyed the paper :)
Edit to add that on non eligible markets your theory is correct, for example: https://polymarket.com/event/will-jesus-christ-return-before...
There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
1. The article mentions the bid/ask spread for contracts, but I believe that Kalshi also has its own fee structure. Small edges (an expected loss of 0.57¢ on a 1¢ contract implies an expected gain of 0.43¢ on a 99¢ contract, or a 5.75ppt edge) can be easily eaten by even small fees, and liquidity provision is all about small edges.
2. The article ignores the time value of money, and contracts take time to resolve. If a contract won't resolve for six months and the risk-free rate is 5%, then buying a "sure thing" over 97.5¢ is a loss net of otherwise earnable interest.
3. Long shots offer greater implied leverage to bettors, making them more attractive. This is still (sometimes) an exploitable mispricing, but it's closer to the well-understood "bet against beta" factor.
(Edit to add) Also, I think their explanation of the non-returns on finance is lacking:
> Why is Finance efficient? The likely explanation is participant selection; financial questions attract traders who think in probabilities and expected values rather than fans betting on their favorite team or partisans betting on a preferred candidate. The questions themselves are dry ("Will the S&P close above 6000?"), which filters out emotional bettors.
Financial contracts are the ones that are most perfectly hedges with existing markets. "Will the S&P close above X?" is a binary option, after all, so it's comparatively easy for a market-maker to almost perfectly offset their Kalshi positions with opposite positions in traditional markets.
As I read it, the implication is that a market maker in the high-P regime needs to still have an expected edge of 1.75% to profit net of fees, which means that the 'maker return' table in this article is net negative after fees for all categories save for entertainment, media, and world events.
I will also add to the 2nd point that some of these platforms due give fixed interest to positions in unresolved markets.
For instance, if you spot malware in a commit you could bet heavily against it being merged, and that would attract the maintainers' attention, and they'll see what you see and not merge it, and you get paid for the code review--that money would come from whoever bet that it would get merged, which you could require be the author of the malware. I haven't worked it out entirely but it seems that there are opportunities to build games that reward dilligence and transparency and penalize deception and spam.
This thought experiment took part in a world where the web was significantly worse than our own: hoards of malicious AI's and precious few humans trying to not be mistaken for a malicious AI. Of course a pre-existing trust relationship is much better, but ideally there'd be a way for untrusted authors to make it through to a real human somehow. Attaching money to the commit would be one way to do that.
Similarly, betting that a public figure will still be alive a month from now is functionally equivalent to putting out a hit on him.
In the case where you're betting heavily in favor of a commit, maybe because you've reviewed it and think it's good, maybe because it contains malware you want to inject... you'd be attracting reviewer attention to that commit because if they can talk the maintainers out of it they end up with more of your money.
Probably the best strategy for a malicious committer would be to sneak through a low value nothing-to-see-here commit, because the low bet would not attract extra reviewer attention, so the maintainers have to set it high enough that it still incentivizes review.
I don't want to live in this world, by the way, I'm just afraid we might have to.
And the people losing their life savings on gambling now have one more tool.
But what do I know. I’m probably oblivious to what greatness those Truth Engines will enable.
dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025)
core findings:
longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time.
wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%).
optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value.
category variation: finance markets are efficient (0.17% maker-taker gap) while high-engagement categories like media and world events are inefficient (>7% gap).
mechanism: makers do not win by out-forecasting takers. they win by passively selling "yes" contracts to optimistic bettors
This is interesting and makes a statement about positive or negative orientation in human psychology. Also, couldn’t the bets just be worded in the double negative instead of the affirmative to influence the optimism bet?
Of course in practice, there are issues like low trading volume, market manipulation, etc. And whether or not a particular market is performing better than, say, super-forecasters or experts in a given field is an empirical question.
That said, it seems a bit excessive to dismiss prediction markets as merely gambling platforms that add no value to society.
In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run.
Slots are also unskilled games, prediction markets clearly some participants have a clear market edge, thus not efficiently priced.
> Takers pay a structural premium for affirmative "YES" outcomes while Makers capture an "Optimism Tax" simply by selling into this biased flow.
It's still operating like a casino in that there's a "house edge" that comes from taking bets. Unlike a casino, there is nothing stopping the average person from market making, which is why it doesn't make sense this structural inequality exists.
This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit.
And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a tacit admission that our markets aren't even remotely efficient, and that includes predictions markets. Efficient, rational markets are the exception, not the rule.
In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.
Instead in an efficient market everyone is already occupied making X ROI and gives as much up by entering a new market as they gain.
Put another way, if you already own a sock with 10% ROI, you can sell it and buy a sock with 10% ROI but the transaction is pointless so it doesn’t occur.
> An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question.
Perfect information means something different here. In Chess both players have perfect information of the game state, they don’t know the future. Poker has randomness and imperfect information but there’s other games with randomness and perfect information.
If people knew more about economics than just whatever is being parroted as 'economics' in mainstream media they would know that there's a variety of types of markets that happen in the real world and none of them are the abstraction of a free market that allows econ 201 students to compare what happens when you introduce trade between a country that produces 4 apples for 3$ each and a country that produces 5 oranges for 4$ each.
Could you use inefficient markets as a predictor of great volumes of insider trading?
If the odds in some financial products are worse than gambling while everyone can access gambling, then people should stop making a distinction under the guise of protecting investors
it just drives investors to actual gambling because they cant get the exposure they were already looking for
This argument gets trotted out by Wall Street every decade or so, usually under the guise of "democratising" some piece of finance. It's almost always bunk.
Most investment capital is looking for safe returns. It's not competing with gambling. Even within the high-risk end of finance, the game is in turning that high risk into above-market but predictable returns through portfolio mechanics. (Fuckups aside, you can't generally portfolio mechanic your way out of the negative expectated value of a lottery ticket.)
More simply: the notion that we need to increase risk and profitiabilty for intermediaries in investments to keep people from gamblig is a false economy. Gamblers are seeking a different thrill from what financial markets are designed to provide. To the degree we have a problem, it's in letting our markets look more like casinos.
> exposure they were already looking for
Broadly speaking, if you want exposure to the economy you're investing. If you want exposure to a number that goes up, you're gambling. This is an overly-simplistic delineation. But it works for first-order estimates.
I'd almost agree if the volume on $SPY zero day options wasn't so immense.
Which isn't even tied to the spot price of VIX on a daily basis.
So buying VIX as a hedge against black swan events (or Donald Trump's stupidity) is a losing trade, which is wild to me.
The states regulate gambling and the feds only protect the state's rackets by restricting online gambling, and the feds regulate financial markets that are not considered gambling, we get it, its two different governments that don't see the silly user experience they've created and are both very passionate about what they do. The people regulating the financial markets think they are doing a noble good by protecting people from losing their money, and now, fast forward to the present, neither are the regulators of sports betting
I didn't write this about sports gambling or event markets and I don't care about that particular subset. There are many many many markets and financial products either accessible or not, in this paradigm
The user experience is stupid when the dumbest trades are still available after the investor has been protected
The capital wants to move so let it move
The regulators should continue mandating transparency and keeping markets operating predictably, but they need to get out the way of approval or denials of financial products or access to them, because its redundant and silly