688. When Is a Bet Not a Bet?

Stephen Dubner (0:07)

When it comes to prediction markets, there are a lot of questions. Last week, in part one of this two-part series, we asked a big question right in the headline. Are prediction markets the best forecasting tool ever, or just another casino? In today's episode, we have more questions, like when is a bet not a bet?

Or more precisely, when is a prediction market bet gambling, in which case it would typically fall under state regulation? And when is it a trade on an event contract, which is regulated by the federal government?

Tarek Mansour (0:39)

These are really great questions, and I really enjoy talking about these questions.

Stephen Dubner (0:42)

That is Tarek Mansour, who co-founded and is CEO of Kalshi, the biggest prediction market in the US. As for these thorny questions about prediction markets, I like to think of them as risks rather than downsides.

Tarek Mansour (0:55)

Like AI comes with a bunch of risks, and we know that there's risk of online addiction, a lot of people kind of having mental health issues because of AI, and there's job displacement. New technologies come with a series of risks. I come with the view that thinking critically about these risks and embracing regulation ahead of time upfront actually is an enabler of growth.

Stephen Dubner (1:16)

That at least is the path that Kalshi has taken, collaborating with federal regulators to create a new kind of financial platform. Mansour's ambitions go well beyond betting on sports and politics and culture. He sees Kalshi as a new kind of financial exchange.

Today on Freakonomics Radio, we ask Mansour and other proponents of prediction markets to talk us through the risks.

Robin Hanson (1:41)

On some topics, I might not recommend making a market.

Stephen Dubner (1:44)

We also hear from a regulator.

Gary Gensler (1:47)

To some extent, even the stock market itself is a prediction market.

Stephen Dubner (1:51)

We consider whether this whole enterprise may at some point be shut down.

Nicole Kagan (1:55)

I would not like to see prediction markets banned in the United States.

Stephen Dubner (1:59)

Part two in our series, The Price of Prediction, starts now.

SPEAKER_6 (2:14)

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

Stephen Dubner (2:31)

Tariq Mansour is the 30-year-old CEO of Kalshi, and on paper, he's already a billionaire. When he talks about the power of prediction markets, he can make it seem as if they've got magical properties.

Tarek Mansour (2:44)

For instance, Kalshi is really the most accurate way to predict the future, which is pretty cool.

Stephen Dubner (2:50)

And?

Tarek Mansour (2:51)

Allocation of capital, that's incredibly important.

Stephen Dubner (2:54)

And even this?

Tarek Mansour (2:55)

It will also depolarize the conversation across the board.

Stephen Dubner (2:59)

Mansour also argues that prediction markets can be a more nutritious alternative to social media.

Tarek Mansour (3:06)

People on prediction markets, they're reading about politics, and they're reading about the economy, and they're getting engaged, and they're getting smarter, and they have these nuanced smart takes, taking them away from whatever they're being fed on these social media platforms that is driving them to extremes more and more over time.

Stephen Dubner (3:23)

So how well do these claims hold up?

That depends on who you speak with. Let's start with another advocate of prediction markets. The George Mason University economist Robin Hansen has been exploring and promoting this type of market for decades.

Robin Hanson (3:40)

On accuracy, they just consistently win. It's pretty clear that when you have a market on a topic and you compare it to another mechanism at the same time on the same topic, the markets are just as accurate or much more accurate.

Stephen Dubner (3:54)

Hansen has by now heard all the arguments against prediction markets, like the claim that they are a slightly classier version of gambling. His point is that if you want to call prediction markets gambling, then you need to think about whether our stock markets are also gambling.

Robin Hanson (4:11)

Ordinary financial markets really give people pretty much as many gambling opportunities as they might like. I guess you're just going to say, oh, but the sports betting you're allowing here is maybe more fun for them. So it's the added fun that's actually what you're objecting to unless the losing of the money. But you might say, I don't want people to have so much fun because they lose money when they have fun. And I might go, okay, fine, you're going to be a killjoy.

Then I might say, look, there's other purposes of markets, which is aggregating information, but we can distinguish roughly which markets add more information versus less. So a market on some small sporting contest really isn't very likely to add information about very many practical decisions out there. I might just want to say, if you're going to cut back on people having fun because you think they're wasting too much money having fun, I'd say we'll just allow the markets on questions that matter.