The microstructure of wealth transfer in prediction markets
jbecker.dev186 points by jonbecker a day ago
186 points by jonbecker a day ago
I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control.
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.
It's a national security issue too.
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...
Wouldn't the counterargument to this be that if the poor grunt is willing to betray his country for money in the prediction market, he would also be willing to take money from enemy x to do the same thing?
With the prediction market, there is a financial incentive for people on the opposite side of the bet being motivated to uncover the malfeasance.
If you're a grunt trying to contact Russia or china you're much more likely to end up talking to an FBI agent posing as a foreigner. Prediction markets make it easy and anonymous.
A good general rule is to make it hard for people to do bad things, and to not create incentives to do so. This seems to do the opposite.
I think doing war crimes is the real betrayal of the country. But we have a president who think his personal morality is superior to international law, ratified treaties (despite the supremacy clause) and so on. This is overtly and explicitly unconstitutional.
> he would also be willing to take money from enemy x to do the same thing?
The prediction market is the mechanism by which this happens.
Nobody is going to uncover anything on bets when they're done an hour before the event happens. This isn't the stock market and trying to connect it to what happens on the stock market makes no sense.
With the venezuela attack, the real trade wasn't on Polymarket or Kalshi.
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.
It's not necessarily illegal use of secret information.
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-...
You could see USAF and navy air power operating in venezuela on ads-b. I was shocked seeing F15s. You'd think there'd be no way the military would have ads-b activated while performing military operations.
When you're doing extra-legal military operations in a country that isn't at war, what choice do you have? There are civilian aircraft up in the sky. Having a fighter jet run into one and kill a bunch of civilians is a bad PR situation.
That's neat. Though I'd say it was the first public sign. The US had been telling anyone willing to listen for weeks beforehand that an invasion was coming.
Disbelief and normalcy are a hell of a drug. Unless someone fully expects something terrible to happen and they are deliberately trying to find out when it'll happen, most people will happily ignore all of the signs until it's too late.
Just look at the lead up to the Ukraine invasion, the US intelligence services were practically screaming from the rooftops that it was happening. Russians were obviously stacking up on two borders. Meanwhile, reporters were on the street asking people how they felt about the oncoming invasion and they all said some variation of "they've been threatening that forever, it's all talk, it won't happen".
> Meanwhile, reporters were on the street asking people how they felt about the oncoming invasion and they all said some variation of "they've been threatening that forever, it's all talk, it won't happen".
The Ukrainian government took the approach of not starting a full on panic. They thought maybe there was still some chance of stopping it. And not knowing 100% the day and time meant stopping the economy, people fleeing and such. It could even play into the hands of the enemy as they could react and postpone as well.
Some have criticized the government for that tactic science. Some might say they should have listened to the US intelligence instead, but that presumes people should trust the US intelligence more than their own government.
Well, one problem is that the US intelligence services might have a credibility problem with the general public.
Counting cars in Best Buy parking lots on black friday used to almost be a meme in the GIS community until ai models became reliable enough.
You can also do entertaining things like determine if a factory/data-center is running at full capacity by looking at the fans in the cooling stacks. Satellites take the red, green, and blue channels separately at different times so you can see if a fan is spinning through the apparent chromatic aberration of the blades, same deal with anything else that spins or moves. If you know the satellite you're buying imagery from, its TLE and a little information about the sensor you can work out all sorts of fun details.
Pizza orders are also an indicator https://en.wikipedia.org/wiki/Pentagon_pizza_theory
The irony that operational national security would be greatly improved if only they maintained a well staffed and resourced government kitchen for the Pentagon, but won't for many silly reasons. Oh no, lots of people would have to sit on idle standby many times, or gov't employees would get free meals.
The Pentagon has a ton of restaurants inside. There's literally an official mall-style map of all of them right here, I count almost 30: https://www.whs.mil/Services-and-Information/DoDCC/
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).
There are several restaurants there. The Domino's thing is back from the first Gulf War and wasn't even really true then
I believe that orders probably do go up. I don't believe the sites/accounts using Google's 'how busy' have any relevance at all. As I understand it, these just use GPS/location data of phones.
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.
That person is reportedly in jail and facing serious time.
https://finance.yahoo.com/news/trump-jails-venezuela-leaker-...
Anyone with a security clearance making bets like this is not a smart person.
Stats on politicians trading habits, indicates insider trading like this is standard practice in the USofA.
No beleives MAGA nuts are trading experts.
Politicians don't have anything to lose from this. There is (shockingly!) nothing illegal about politicians making trades based on decisions that they know they are about to take that have a significant and easily predictable impact on the market.
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.
A number of Trump's cabinet advisors have strong backgrounds in finance. At least two former hedge fund managers and one VC that I know of in prominent positions and I do not know much about American politics.
No worse than existing financial markets, and we already deal with those.
The big difference here is that if you buy short-dated out-of-the-money options and make it big, the SEC comes knocking on your door and reads your text messages to find out what you knew and when.
It's both easy to track down stock traders due to KYC, and easy to prosecute due to laws.
Polymarket and friends make it both much harder to find the trader, and also it's less clear if there's a legal theory that lets you prosecute someone dealing in these new markets.
Sure, congress and the president can insider trade a bit here and there, but the everyday joe is rightfully afraid to.
It seems like the difference is all due to historical accidents in the US and laws that should arguably be changed. Nothing to do with prediction markets by itself.
I'd just like to make the distinction between:
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.
Of course the next step beyond that is "leaking" false information as a decoy by placing large bets on certain events. If that happens enough times it seems like it should wash away the value for agencies hoping to act on "privileged" information.
This gets into a philosophical point about what a prediction market actually is. If it's a device for anonymously aggregating fragmented group information into a coherent accurate prediction, the lopsided bets are a feature; the only point of the market is the price signal, and the lopsided bets true up the price.
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.
> How many times Pam Bondi says the word "China" in a press conference.
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.
That's the actual point. Everyone else is there to make money gambling, but the whole premise is to incentivize people with secret information to share it anonymously with the public, and take a reward for doing it.
All without traceability or secret drops or whatever.
POSIWID
> POSIWID
Everyone can make up a silly purpose.
Against POSIWID: https://www.astralcodexten.com/p/come-on-obviously-the-purpo...
Oh, I suppose one could interpret it as literally as possible, and arrive at that essay's conclusion.
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.
> All without traceability or secret drops or whatever.
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.
The market can only resolve based on public information, so it could only incentivize revealing information that is already destined to be imminently revealed. Furthermore, it doesn't incentivize sharing that information with enough lead time to actually take action based on that information; the opposite is actually true, insiders are incentivized to wait until just before the event to make their trade, meaning that the public gets no actionable information in practice. And that's assuming that you can distinguish an insider from someone lying for the sake of market manipulation.
Untrue. Insiders are incentivized to trade when they can buy at the lowest price. That could be at any point up to the event.
> [...] insiders are incentivized to wait until just before the event to make their trade, [...]
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.
Without additional signals, you can just as well use it to manipulate markets.
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.
> 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.
> it gives very powerful people a vehicle to make lobsided bets on outcomes they control
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.
All of these things are much more subject to the problem that effects policy generally: the law of unintended consequences. Betting on the policy, rather than an intended/expected longer-term outcome that is easily derailed by intervening events outside of your direct control is much more direct (plus, if you are corrupt enough to bet on policy you control, that policy is probably already seeking a longer-term aim that serves your existing financial interests, so the ability to bet on the policy itself makes the corruption more attractive by providing a more immediate and certain payoff on top of the longer-term, less certain one.)
You are not wrong, and I should clarify I also have a big problem with the current state of legal insider trading of elected officials, but this polymarket problem is much more extreme. You can get a guaranteed 100-1 payout by blowing up some random people on the other side of the planet. Way worse than making even 2-5x on a leveraged futures bet with insider info. In that example, the victim is usually just other rich people.
If we want to go turtles all the way down, we could create a market to predict trading by decision makers and thus incentivize leaks from the betting markets.
Well, insider trading should be legalised in general. It would be better for the general public.
See https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_...
It would deter those who are not insiders from investing as returns would shift from them to insiders.
As the biggest social benefit securities markets provide is to enable raising capital this is a huge drawback and makes things worse for the general public.
> It would deter those who are not insiders from investing as returns would shift from them to insiders.
Retail investors should be index funds anyway.
Until fairly recently there was no 'insider trading' you could get in trouble for in commodities in the US. That hasn't stopped non-insiders from trading in commodities.
Also, even if insider trading is legal, that doesn't mean your company needs to allow it: you can still punish your own employees for it, and eg claw back bonuses and sue for breach of contract and breach of fiduciary duty.
The main thing the (American) laws against insider trading does what private contracts can't do is to make the golf buddy liable, too.
In any case, American insider trading regulation is already laxer than French insider trading law. And it doesn't look like French companies have an easier time raising capital.
> Retail investors should be index funds anyway.
That does does not solve the problem as insider traders will still be shifting profit to themselves. You still need non-insiders (not necessarily retail investors) to make the market work - even for insider trading to work you need a non-insider to trade with.
> Until fairly recently there was no 'insider trading' you could get in trouble for in commodities in the US. That hasn't stopped non-insiders from trading in commodities.
Can you show that it had no impact on how non-insiders traded? How recently was recently?
> Also, even if insider trading is legal, that doesn't mean your company needs to allow it: you can still punish your own employees for it, and eg claw back bonuses and sue for breach of contract and breach of fiduciary duty.
A lot less of a deterrent, and a lot of people with access to inside information have a lot more to gain than to lose.
> In any case, American insider trading regulation is already laxer than French insider trading law. And it doesn't look like French companies have an easier time raising capital.
Both do have insider trading laws so both are probably good enough, and there are a lot of other variables.
Prediction markets don't uniquely enable it, but they make it far more effective and easy.
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.
> Insider trading is illegal.
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 also just... not place bets on completely bizarre prediction markets like "how many times this person says this word". The market can sort it out, etc.
You have completely missed my point. I don't give 2 shits about people losing money gambling. I give a shit about the Whitehouse doing insane things just so they can use the insider information to personally make money. Did you know on Oct 10th someone made $200M on a BTC short position made 30 minutes before Trumps announcement of 100% tariffs on China?
People make short positions all the time in crypto, and long, and levered long and short, because of hedging. Same in equities market
Isn't this the intent of a prediction markets?
IIRC the original prediction markets existed to try and get as close as possible to finding the true answer to open questions. Someone willing to bet a lot of money on an outcome (because they have an edge/are very sure of an outcome) is the point, they're putting their money where their mouth is...
Plenty of more fun dynamics. For example, in some cases it becomes a way for voting for decisions one otherwise wouldn't control. If a person in position to make a decision doesn't really care about any choice in particular, seeing the prediction market lean one way would incentivize them to choose the opposite, making a short sale immediately before.
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.
A lot of these issues mostly disappear if you use play money.
It turns out that play money prediction markets are just as good as the real money ones.
Perhaps a bet should convert into play money if the stakes get too high and the temptation for "induced manipulation" is deemed too strong. The issue is how high is too high?
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?
Yeah - in principle betting markets are also bribery markets. Instead of betting based on expectations, one can bet the opposite of the outcome they desire.
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".
+1
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
How is that any worse than existing financial markets?
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?
> the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control
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.
Why isn’t political gambling in the UK a problem then?
It is. https://en.wikipedia.org/wiki/2024_United_Kingdom_general_el...
> 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.
People being charged doesn't mean there's a problem of any significant magnitude for society.
well, at least for really odd ones - like the china example - the liquidity is (probably) going to be really low. you need people buying both sides to make money.
But for big events/talked about stuff/etc ofc this is not true.
Again - Its not the money I care about, its what people are willing to do to make it.
If there's not much money to be made (because of illiquidity and adverse selection keeping market participants out), then there's not much incentive for people to do weird things.
I've been telling people it only takes 2 or 3 people to throw a football game. The person who hires the ref(optional), the ref, and the person who places the bet.
And I was told I was crazy.
Hahahahahahahahahaha. Nope I was right.
Huh? It's pretty obvious that you can influence the outcome of a sports event, if you can influence the ref or if you can get a player on one side to pretend to be less competent than she normally is.
10 years ago we'd be called conspiracy theorists.
Sports Betting Scandals have been a thing for probably almost as long as sports exist, i don't get why you think that this was a thoughtcrime 10 years ago?
https://en.wikipedia.org/wiki/Sports_betting#Famous_betting_...
wouldn't surprise me to find out that even cavemen were manipulating outcomes of stone-throwing contests to earn some more meat.
I think the disagreement was over whether it was likely that people threw matches like this, not whether it was possible.
> Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control.
OK, and? The market is just paying them to make information about their decisions public.
Parent comment has a strong implication that the bets will impact their decisions, and invariably for the worse.
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)
Correct. I've always had a hard time getting my point phrased in a way that gets people to understand my point, but I'm baffled that people don't see an issue with creating something that says "Hey if you blow up these random people in Iran today you can make $50 million dollars and no one can punish you" and thinking its not a big fucking deal.
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.
I replied to 1 comment below yours - but I want to ask, how do you think this incentivizes people to make info about decisions public? That would lower the return on their bets.
I think the war ones are the only real concern.
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.
First - I can not comprehend how you could possibly have a charitable interpretation on the war point and how it might have a net positive. I'm not trying to be condescending or anything, I would like to hear a single positive for being able to make BTC bets on killing people.
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.
If I live in a country that is under threat of being attacked by U.S. it is nice to have a website where I can look to get a reasonable probability that the attack happens
That figure will also be hugely unreliable, because as we've seen, there is tremendous incentive for insiders to leverage their information immediately before it's relevant.
If the odds sit at 97% NO for weeks or months, then 3 hours before the invasion an insider makes their play, you would have to be constantly monitoring this market, interpret that spike correctly as an insider trade, and be able to, in that very short amount of time, take actions that change the outcome for you, personally.
Doesn't seem like much of an upside to me.
> When the topic is dry and quantitative (Finance), the market is efficient. When the topic allows for tribalism and hope (Sports, Entertainment), the market transforms into a mechanism for transferring wealth from the optimistic to the calculated.
I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism,
>I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism
where is your paper?
Something that appears to be missing: Certain events attract "advertising" types of bets. E.g. There is value in making a candidate appear to be a leader, so dedicating dollars to swinging the market is more of a form of advertising than an intelligent bet.
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.
super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption."
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.
> but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap)
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!
If we weight by contracts purchased the gap is 1.02%, dollar weighted the gap is 1.00%.
I'm glad you enjoyed the paper :)
I'm a little confused by the "Yes" versus "No" asymmetry.
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?
> Why is Kalshi structured with these yes vs. no options for all outcomes?
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)
It’s not really margin since there’s no leverage: the potential loss associated with the bet has to be deposited, so it’s fully collateralised.
right, I guess I should have said it's what they have _instead_ of letting users trade on margin.
Part of this perceived arbitrage is the fee structure. Kalshi has a weird transaction cost structure but taking advantage of that 1c arb probably costs you 2c in fees to Kalshi, so nobody does it.
This is incorrect and tiresome to constantly hear as a go-to explanation for supposed market inefficiencies.
10c yes seems really high for a tie. NCAA rules don't allow for ties in football. I know prediction markets have very long shot bets but I would expect that to be closer to 1c
Edit: it looks like the tie market is only for if the game is tied at halftime, which makes much more sense
I'm getting some really skeezy ads for prediction markets on TikTok at the moment, the message is effectively "hey, are you broke? earn $50+/day on Kalshi!"
The Polymarket twitter accounts are massive ragebaiters. This is sports betting with some two minutes hate added in.
I have to say I was this huge fan of the idea and I didn’t anticipate it would happen like this.
I have occasionally tried checking Polymarket and Kalshi to get an idea of the general political/cultural/technological consensus on various issues that are difficult to research otherwise, eg. "what are the chances that the Senate changes hands in the 2026 midterms?" People have thought about it enough to wager a million dollars and the consensus is at about 1/3. I have this abstract prediction market in my head, each bet placed by some statistically average person with diverse experiences and exposures from my own bubble, who carefully considers their information and puts their two cents into the pot, and I assume that by adding all our ideas together we form some sort of combined intelligence which is more insightful and reliable together than any individual pundit could be.
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.
Polymarket is currently predicting a 3% chance of Christ returning by 2027
https://polymarket.com/event/will-jesus-christ-return-before...
That’s because 2027 is too far out, as the deadline gets closer it will trend towards 0%.
Buying “Christ doesn’t return” at 99 cents right now would be unprofitable, you will wait a year or so to “profit” 1 cent.
It will be resolved by "credible sources".
The then credible sources did not believe Jesus was the Christ at the time of the first coming!
If there was a second coming what would money be worth?
What exactly are people betting in this thinking? Just betting on anything with long enough odds?
Election polling, analysis, and prediction is a mature industry with plenty of reliable commentators who can help answer your question. Here is just one example:
https://www.cookpolitical.com/analysis/senate
Portrayal to the contrary is mostly due to non-experts pumping their own ego, or deliberate media spin.
I don't follow this part, can somebody maybe explain?
> Yet on Kalshi, a CFTC-regulated prediction market, traders have wagered vast sums on longshot contracts with historical returns as low as 43 cents on the dollar.
On prediction markets traders can bet both sides. E.g. on Polymarket I can currently bet that Greenland will be acquired by USA before 2027 and get 4:1 odds: or I can bet that this doesn't happen, and give 4:1 odds. If these odds are off, doesn't this mean that one side gets a bad return on investment, however the other side gets an equally good return?
On balance the average return on investment by traders should just be 100 cents minus the margin of the prediction market, which tends to be only a few percent.
How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?
Interest on open positions. Polymarket pays about 4.00% annualized holding rewards on eligible markets/positions (not all). Kalshi pays about 3.25% APY on cash plus open positions (collateral).
Edit to add that on non eligible markets your theory is correct, for example: https://polymarket.com/event/will-jesus-christ-return-before...
The usual thing is that the market ends up around $0.95 for things like that, if the actors are all solid investors. It only takes one overly enthusiastic yes buyer to break that ceiling, the smart money won't "correct" it down to $0.95
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
that's correct. Also Kalshi does pay out interest on, and Poly does on a few markets
A market maker needs a premium to provide liquidity. If all else is equal, why would they take on execution time risk? This is a universal feature of continuous-trading Central Limit Order Books (CLOBs), not something unique to prediction markets.
An interesting article, however my question is technical.
In the "The Mechanism of Extraction" section, how is that image made? It is nicely laid out, and has a nice "hand-drawn" feel. This is a good format for many technical drawings, but I have not found any tools that could create this.
I’m surprised by the somewhat positive comments. I thought this was just a chance for insider trading without repercussions. If I work at $corp and know the hotly anticipated whatever is announced tomorrow, I can finally cash in on that knowledge.
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.
The analysis is interesting, but I think it ignores a few factors:
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.
on point 1, an important thing to know is that these markets have a non-linear fee structure where the rate is higher near 0.5 and lower near tail prices
True, but from the pdf it seems like the fee charged of market makers is 1.75¢ × P × (1-P) per contract. Near P=0 that's approximately 1.75% of the notional amount invested, but near P=1 that's approximately 1.75% of the potential gain.
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.
Fees are also waved if a market maker hits a certain monthly quota. With the recent adoption of “professional” market makers on the platform, I’m sure they can get around such fees.
I will also add to the 2nd point that some of these platforms due give fixed interest to positions in unresolved markets.
I hope we manage to leverage prediction markets to actually achieve goals rather than just making a casino out of it.
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.
It’s not clear to me how you’d get anyone on the other side of that market. Anyone who is capable of understanding the wager would see the same thing you did, and not bet in its favour. Anyone who can’t understand the code will just pass the bet by and play some other market they do understand. The malware author is presumably not someone you can compel to do anything, never mind pay out a losing bet.
The way I imagined it, the maintainers wouldn't be considering a commit whose author was not willing to bet on its success.
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.
However, your bet against it being merged incentivizes contrarian behavior by the maintainer in order to claim your wager for himself.
Similarly, betting that a public figure will still be alive a month from now is functionally equivalent to putting out a hit on him.
Alternatively, you can bet a few tens of thousand that your enemy is going to be alive in a few weeks and let the market handle the rest.
Why not just bet heavily against and then inform maintainers? By just betting on it instead it makes you look like you, or someone you know planted the malware
That is what I meant to say, that you'd inform the maintainers along with your bet against the commit. In this thought experiment I assumed that the maintainers are already being spammed by AI so heavily that the bet is necessary to get their attention. (Neal Stephenson had something similar going in in Anathem, he called them "bogons".)
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.
Has anyone noticed a lot of polymarket posts on their X (formerly known as twitter) feed claiming to be making a fortune? It makes me feel like its some kind of coordinated guerilla marketing scheme.
I feel we need a term for these attempts to paint gambling as something other than gambling. Or just proper enforcement for gambling platforms like "prediction markets". Personally I find it disappointing to see so many people wasting their time on this stuff. I'm sure Coplan, for example, could be a productive member of society, but instead chooses to waste his time on stupid stuff like Polymarket.
Prediction markets perform the valuable function of information aggregation, at least in theory. When there is a financial incentive to make a correct prediction, the market should converge on the probability an ideal observer would assign to the event.
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.
I have no background in financial markets at all, but it strikes me that in markets like this, the "house" should be insiders right? The Maduro capture had an insider profit something like 400k. How would one go about understanding how that impact efficient markets?
Could you use inefficient markets as a predictor of great volumes of insider trading?
tl;dr
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
> 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.
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?
I wish I had read the comments (ie your comment, as it's the only one now) before reading the article!
This reminds me of the old scheme where if you just bet against ND football you'd make money because ND fans were so rabid that the "ND is good" positions became overpriced.
Yes, in the study they pinpointed this beautifully: “A fan betting on their team to win the championship is not calculating expected value; they are purchasing hope.”
I don't think that makers sell "yes" they take both ends of the bet, but they make more money on selling yes,apparently.
This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability.
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.
If you read the article:
> 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.
i understand how probability works. the "93 cents" vs "43 cents" comparison is looking at realized historical data, not theoretical odds. if the markets were efficiently priced, you would get 100% back. the entire point of the paper is showing that, historically, they aren't efficiently priced (longshots return ~43%), and explaining who captures that inefficiency.
> 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.
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.
You misunderstood a basic principle here.
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.
If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question. If that sounds absurd, then yes, that's the point: our assumptions about what it takes in order to achieve an efficient market approaches the absurd. Which isn't to say that markets aren't often useful, especially compared to the alternatives, but rather that appeals to rationality don't survive contact with the enemy.
The economy is finite. You can’t infinity add new participants with infinite product to sell.
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.
Free markets aren't even an exception. They're an abstract construction that exists to make economic analysis scientific by removing all confounding variables from the equation. I'd be extremely surprised to find one example where the conditions required of a free market truly existed.
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.
I wonder how much of the activity on prediction markets these days is competing LLM scripts? I would guess the overlap in prediction market punters and AI boomers is high.
It'd be a good way to lose money at the moment. Probably not too far off in the future it would make sense though
LLM-superforecaster parity projected to late 2026 (and LLMs now outperform non-expert public participants) according to https://forecastingresearch.substack.com/p/ai-llm-forecastin...
To me this is all the more reason to get regulatory gatekeeping out of the financial markets
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
> 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.
> Gamblers are seeking a different thrill from what financial markets are designed to provide.
I'd almost agree if the volume on $SPY zero day options wasn't so immense.
The same financial products are used in both gambling and smart investing. The canonical example here being options. And the restrictions on what the public can and cannot invest in are complete bullshit. You can't buy shares in a series A startup because that is deemed to be too risky for anyone who is not an "accredited" investor ("accredited" here literally means rich). But anyone who wants to can bet on sports, go to a casino, or buy a 2x levered VIX ETF.
>or buy a 2x levered VIX ETF.
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.
It's not tied to the spot price of the VIX because there is no spot price. It's a third order calculated quantity based on options pricing. Not that anyone who gambles on that ETF knows that.
You're misunderstanding the dynamics here. Modern prediction markets are 90% sports gambling by volume. The trick is that, by positioning themselves as general financial markets and accepting the corresponding regulatory gatekeeping, they're exempt from the often much stricter regulations that states put on normal sports gambling apps.
My stance has been the same long before prediction markets, long before sports gambling moved to prediction markets, and the landscape has been the same the whole time
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
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