\n With \u201cvirtually limitless\u201d applications for businesses and policy makers, these new forecasting tools \u201cshould be freed of unnecessary government restrictions.\u201d Regulators, they argued, should allow contracts on any economically meaningful event \u2014 elections, environmental risks, monetary policy, etc.\n <\/p>\n
\n Since then, we\u2019ve gotten event contracts for just about anything. The markets aren\u2019t perfect crystal balls, and crowd wisdom can be misleading, but they\u2019ve had some notable wins, like when Polymarket bested the leading polls and pundits to call the 2024 presidential race in Donald Trump\u2019s favor. And traders have consistently anticipated key economic data points, like the rate of US inflation and interest rate decisions from the Federal Reserve.\n <\/p>\n
\n But when those 19 economists wrote their dream scenario, they did so with plenty of guardrails in mind.\n <\/p>\n
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\n The markets would \u201cpresumably not include contracts on the outcomes of sports events.\u201d And the economists made the case for capping the amount any one person could wager to a \u201cmodest sum, perhaps something like $2,000 per year\u201d (about $3,000 in today\u2019s dollars).\n <\/p>\n
\n But with sports betting exploding on prediction markets, and with virtually no cap on wagers, things haven\u2019t worked out quite how they\u2019d imagined.\n <\/p>\n
\n \u201cThis is not the future any of us were hoping for,\u201d Justin Wolfers, a University of Michigan professor and a leading expert on prediction markets who co-authored the 2008 paper, told CNN.\n <\/p>\n
\n Today, the overwhelming majority of trades on leading prediction markets are centered on sports and pop culture \u2014 bets on World Cup penalty kicks or Taylor Swift and Travis Kelce\u2019s wedding that, while fun, are not the \u201ceconomically meaningful\u201d events economists had in mind.\n <\/p>\n
\n Sports are a particularly worrying aspect for public health experts.\n <\/p>\n
\n Over the past month, sports markets and sports-heavy parlays<\/a> comprised about 84% of the total trading volume on Kalshi, or about $18.5 billion, according to data from research firm TickerTracker. (A Kalshi official pointed CNN to its public dashboard<\/a>, where sports, excluding parlays, makes up about half of the volume on the platform.)\n <\/p>\n \n The TickerTracker data indicate that for Polymarket\u2019s US-facing site, launched in May, sports-related markets made up about 99% of the total trading volume, or about $2.1 billion, over the past month. On Polymarket\u2019s larger international site, annual average sports volume accounts for less than 50% of the total.\n <\/p>\n \n Both Kalshi and Polymarket argue that trading on their platforms is distinct from gambling. They offer event \u201ccontracts\u201d that are structurally no different from trading soybean futures. Unlike a casino or a sportsbook, the companies don\u2019t have a \u201chouse\u201d or a bookmaker to set odds and manage bets.\n <\/p>\n \n Practically, though, buying a \u201cshare\u201d that says the Knicks will win the NBA championship on Kalshi or Polymarket looks no different from placing a bet on gambling platforms like FanDuel or DraftKings. And because US law does not treat financial contracts the same as gambling, prediction markets are available to anyone over 18.<\/a>\n <\/p>\n \n Betting on future events is hardly new, but the modern framework of the prediction markets that Kalshi and Polymarket run can be traced to a friendly lunch in 1988, at an Iowa City restaurant called the Airliner.\n <\/p>\n \n That\u2019s where three University of Iowa economists \u2014 Robert Forsythe, George Neumann and Forrest Nelson \u2014 met for food and beers and kvetching about just how badly the polls had missed the mark on the Michigan Democratic primary the day before, when Jesse Jackson absolutely trounced Michael Dukakis.\n <\/p>\n \n \u201cWe three said, \u2018Well, gee, if we were going to predict an election, what would we do?\u2019\u201d Forsythe recalled in an interview. \u201cAnd as economists, the thing that came most naturally to us was, \u2018let\u2019s run a market.\u2019\u201d\n <\/p>\n \n The three launched the Iowa Political Stock Market, now called the Iowa Electronic Markets, as an experiment in whether the wisdom of crowds got sharper when individual participants had real money on the line.\n <\/p>\n \n With just 200 traders pulled from the university staff (and wagers capped at $500), the Iowa market accurately forecast that George H.W. Bush would get 53.2% of the popular vote. Its Dukakis forecast was off by just a smidge: 45.2% versus the actual count of 45.4%.\n <\/p>\n \n Forsythe, Neumann and Nelson would later be among the 19 co-authors of the 2008 paper.\n <\/p>\n \n Forsythe, like many economists CNN spoke to, still believes in the fundamental utility of prediction markets.\n <\/p>\n \n Even Wolfers, who is likely the most outspoken about the harms stemming from sites like Kalshi and Polymarket, stands by the core thesis.\n <\/p>\n \n \u201cA fundamental economic problem is, how do we aggregate information?\u201d Wolfers said. \u201cI believed back then, and I still believe, that markets are an incredibly efficient way of doing that\u2026 Most of the alternatives are pretty bad, and markets appear to be less bad.\u201d\n <\/p>\n \n Economists also point to potential advantages in anticipating customer demand. Earlier this month, a Manhattan bar ran a promotion promising to comp customers\u2019 drinks if the Knicks won the first game of the NBA Finals, per the New York Times<\/a>. As a hedge, the bar put $5,000 on the Knicks winning, which netted the bar $8,000, nearly covering the bar bill.\n <\/p>\n \n Markets may even help combat misinformation. Columbia University researchers recently found that participating in a \u201cclimate prediction market\u201d incentivized skeptics to learn about climate science and ultimately support climate-friendly policies. When people put money on the line, they tend to rely more on facts, the researchers told Columbia\u2019s Insights magazine<\/a>.\n <\/p>\n \n CNN has a partnership with Kalshi and uses its data to cover major events. CNN editorial employees are not allowed to purchase contracts on prediction markets.\n <\/p>\n \n Economists\u2019 dream of a highly liquid marketplace for information has, in some form, come true \u2013 with some asterisks.\n <\/p>\n
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