#204 - Prediction Markets

Jacob Robinson (0:03)

26 billion dollars in one month. That's the trading volume on prediction markets in just April of 2026

26 billion in one month. Many believe prediction markets are this new and novel business, which were started by projects like Kalshi or Polymarket. You might even think that too, but that's wrong. You're off by about 600 years. Prediction markets are not new. They've been around longer than the United States has existed as a country. They're older than things like steam engines or even champagne.

I spent over 100 hours putting this one podcast together. My goal is to take you, even if you've never heard of prediction markets, to a 99th percentile understanding of what they are, how they work, understand the history behind them, the regulation, problems and the futures of these markets. I've spoke with many leading experts to do that.

But how old are prediction markets really? Well, the National Bureau of Economic Research traced the history of prediction markets over 500 years across the Atlantic Ocean to 15th century Italy. Those Italians bet religiously on Papal elections. I hope you appreciated and caught that pun. I couldn't help myself. As well as political elections. By 1503, betting on the next pope was already considered to be an old practice. Bets on these prediction markets weren't limited to the choice of pope either.

15th century Italians would also try to predict related events like when the conclave would end or how long the new pope would reign. This popular practice continued until March 1591, when Pope Gregory XIV banned all betting on Papal elections, the length of Papal reigns or the creation of cardinals. And why did he do that? Well, here's Koleman Strumpf, an economics professor at Wake Forest, who wrote the definitive paper on the history here and has been teaching courses on prediction markets since 2008 He explains what Pope Gregory XIV was first opposed to, and it kind of makes sense.

Koleman Strumpf (2:05)

Take yourself back to the 16th century.

The pope was a much bigger figure than he is today. I mean, he has the direct connection to God. And anything that in any way denigrates the pope would be something that's pretty bad. So for example, one of the first things that Paul and I saw the pope be opposed to were these markets on, will we have a new pope next year? Which basically means you're betting on death. And that's not, you know, if you're talking about the guy who's talking to God, that's probably not so good to be betting on that.

Jacob Robinson (2:36)

But despite Pope Gregory's efforts, the demand for prediction markets didn't end there, of course. It merely pushed the practice underground, which made it more opaque and dangerous for everyone participating.

That concept is exactly what happens when regulations push businesses offshore in modern America. So instead of yelling to ban prediction markets, I've spent two months and over 100 hours making this podcast so that we can have a thoughtful and informed understanding of where the risks are and how to address them. Because prediction markets are important, and I'm not alone in thinking that. Here's Koleman again, who graduated with an economics degree from MIT on the societal importance of prediction markets, even for those who never plays a bet on them.

Koleman Strumpf (3:18)

So there's at least two or three things that I think, you know, from a societal perspective that are favorable.

For people who don't trade in the markets, which I would include myself among those people because I've learned I don't have an edge against people. Like I've talked to a lot of traders and they're much smarter than I am. So I'm not going to beat these people, but I can still go to Kalshi, Polymarket or whatever that you want to pick and I can draft on all the forecasts that these people are generating with their trades. And I can learn a ton about the world, whether that's about foreign affairs, economic indicators, elections. It's pretty amazing. And to me, it's like first step in my sort of news diet for the day. Go to the prediction markets, see the stuff that's bubbling up, use that as a way of informing what I read in the news. And oftentimes, like we're not quite at the point where newspapers, in my opinion, are so disciplined by this stuff. So they write a lot of articles that are, they'll say something about an election and say, oh, this is a close election.

And then you go to the market and it's like, oh, that candidate's 75% likely to win. Skip that article because it just, I mean, I trust the markets over a reporter's vibes. And anyway, maybe someday that'll change, we'll see. So that's one thing. The other thing, of course, is like for the traders, the people who are trading in the market, this is a way of, it's sort of another venue for people who have smarts, to use those smarts as a way of making money. I think the bigger advantage, which we're not quite at yet, but there's been discussion of recently, is the possibility of using these markets for hedging or insuring. And then the idea here would be once these markets are really liquid, people can go to the market and potentially insure against downside risk. You can have these markets allowing people to hedge on, if I own my house, I do own my house. Suppose I want to sell my house, but I want to sell my house next year. I want to lock in a price, kind of like farmers lock in prices with futures markets. I can use a prediction market if there's one, say, on a metro area to help minimize downside risk for price movement. So regular people, big companies, all of that I think is potential.