687. Are Prediction Markets the Best Forecasting Tool Ever — or Just Another Casino?

Stephen Dubner (0:06)

Hey there, it's Stephen Dubner. Before we start today's episode, I want to ask for your help with a future episode about psychotherapy. The episode includes what is called a misery index, and we want to hear some of your stories. I realize this isn't for everyone, but if you are interested, use your phone to record a voice memo and send it to us at radio at freakonomics.com. I'd like you to identify your most intense and persistent form of misery and include some specifics. What exactly was the emotion you were feeling? What's the worst it ever got? How did it affect you and how did you deal with it? If you only want to include your first name, that's fine. Again, the address is radio at freakonomics.com. Many thanks, and here now is today's episode.

Most of us are not very comfortable with uncertainty. And that's a problem, since so many things are uncertain, like the future. Since the beginning of time, we've been trying to predict the future. The ancient Greeks were famous for their oracles. They would also cut open a sheep and read its liver for signs about whether Let's go...

What is the climate pattern related to the climate pattern known as El Nino? Today, there are prediction markets on El Nino, and the markets indicate this year's El Nino may be the most extreme on record. So, are prediction markets an upgrade or maybe a disaster waiting to happen? Will they improve our collective decision-making or are they just another casino in an economy full of casinos? And aren't prediction markets susceptible to insider trading?

The biggest prediction market in the US., Kalshi, recently imposed its first ever lifetime ban against an individual trading on their site. This was over bets on whether George Santos, the disgraced New York congressman, would attend President Trump's State of the Union address. Santos had posted on social media that he was going to attend, but in the end, he didn't. On Kalshi, someone made a profit of $17,000 by first betting that Santos would attend and then betting that he wouldn't. Who was that someone? You guessed it, George Santos. So how much credit should Kalshi get for figuring that out and banning Santos?

Today, on Freakonomics Radio, we will hear from the CEO of Kalshi.

Tarek Mansour (2:49)

Kalshi is really the most accurate way to predict the future.

Stephen Dubner (2:52)

As well as their chief contract writer.

Nicole Kagan (2:55)

These are legal contracts that people are signing on to when they're trading those markets.

Stephen Dubner (2:59)

We'll also hear from an intellectual godfather of prediction markets.

Robin Hanson (3:03)

The hope is that we could use betting markets as a general information institution all across society.

Stephen Dubner (3:11)

Next week in part two of this series, we will hear from a regulator.

SPEAKER_5 (3:14)

What I think is the cost and a very real serious cause is trust in the markets.

Stephen Dubner (3:20)

Our two-part series, The Price of Prediction, starts now.

SPEAKER_6 (3:36)

This is Freakonomics Radio, the podcast that explores the hidden side of everything, with your host, Stephen Dubner.

Stephen Dubner (3:52)

Kalshi and Polymarket, the two big prediction markets at the moment, are together worth over $40 billion. Shane Copeland, who founded Polymarket in his early 20s, was for a time the world's youngest self-made billionaire. One Kalshi founder, Luana Lopez Lara, is the youngest self-made female billionaire. The other founder and current CEO., Tarek Mansour, joined the billionaire list at age 29

But that is not what Mansour wants to talk about.

Tarek Mansour (4:23)

This valuation of the company or my net worth or others, I just don't think that's that important. It's kind of paper money.

Stephen Dubner (4:29)

Okay, so what is important to talk about when it comes to Kalshi and other prediction markets?

Tarek Mansour (4:34)

If you believe in markets and their ability to aggregate information and price something, in the case of prediction markets, they're essentially aggregating information to a question about the future. If you believe in the crowd wisdom and people are kind of putting skin in the game on something, it tends to be more accurate than other places.

Stephen Dubner (4:50)

For someone who doesn't know Kalshi, just describe what the firm is.

Tarek Mansour (4:54)

The easiest, most compelling way to describe Kalshi. It's essentially a financial market, but that captures a much broader universe of things.

Historically, financial markets have been sort of limited to an elite audience, whether it's the stock market or commodities or interest rates. So what we got excited about was broadening that universe to just no questions about whether an event is going to happen or not. It's about things that people care about or relate to or they understand, whether it's politics, the economy, climate, weather, culture, you name it.