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Will prediction markets lead to disaster? It’s a safe bet
Published September 22, 2026 in Finance • 9 min read • 
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While the stock market effectively harnesses the wisdom of crowds, prediction markets are little more than high-stakes casinos with powerful political backing, warns Jerry Davis.
Rapid read:
- Prediction markets offer opportunities to gamble on a wide array of outcomes, from sports contests to wildfires and wars.
- In the most optimistic case, prediction markets provide a version of global risk information.
- Truth Social began selling early access to its data of presidential posts for up to $100,000 a month – the better to know (and bet on) the future slightly before the competition.
Crowd wisdom
Groups of people can be wildly irrational, but there is wisdom in crowds if we know how to distill it. In his 2004 book, The Wisdom of Crowds, former New Yorker staff writer James Surowiecki describes a county fair in 1906 in which visitors were invited to wager on the weight of an ox.
Some 800 people shared estimates, which averaged 1,197 pounds. The correct answer? 1,198 pounds. Any individual may have been way off, but the crowd got it right. Other examples of the wisdom of crowds include the stock market, which is famously hard to beat. People with real money at stake have incentives to gather enough information to make informed bets, and on average the market can be wiser than its individual participants.
What if you could harness this wisdom for events in the world, like elections, natural disasters, or invasions? This is the premise of prediction markets, online platforms that enable users to buy and sell contracts on the outcome of future events, for example, “Will the US announce the end of the Iranian blockade of the Strait of Hormuz by 31 December?” or, “Will the highest temperature in Paris be above 40°C tomorrow?”
There are a growing number of prediction markets. Just as a crowd betting on the weight of an ox can average to the correct number, proponents of prediction markets believe that trading event contracts can yield accurate probabilities – a contract priced at $0.65 implies that the event has a 65% probability of happening. Shayne Coplan, the founder of Polymarket, a cryptocurrency-based prediction market, describes them as a “global truth machine” capable of informing government policy.
Prediction markets offer opportunities to gamble on a wide array of outcomes, from sports contests to wildfires and wars. Of course, allowing people to bet on events that they can influence creates some unfortunate incentives, such as starting wildfires or wars, or meddling in midterm elections. US officials are amending polling employee oaths to safeguard the integrity of the first full election cycle in the presence of mainstream prediction markets.
The life insurance industry long ago recognized that it should sell contracts only to people who do not wish to see the insured die (known as an insurable interest). It’s the reason why you can’t buy insurance for strangers or enemies. But prediction markets are still at an awkward stage, protected by powerful friends like the American president’s son. The early returns range from hilarious to terrifying.
The dream of knowing the future
Steven Spielberg’s movie Minority Report imagines a world in which three “precogs” lying in warm vats of goo predict crimes before they happen, allowing police to arrest and imprison “pre-criminals.” The closest we get to this world is the financial markets, where the value of capital assets such as shares represents the market’s best guess of future earnings.
If a CEO announces a new strategy and their company’s share price drops, they can change course, guided by the North Star of the efficient market. Similarly, if a president were to announce tariffs that caused the market to crash, they could back off after seeing the market’s judgment. In a sense, even if nobody profited from buying and selling shares, the world benefits by having a 24/7 GPS to evaluate corporate decisions and to call out good and bad choices.
The efficient market hypothesis (EMH) – the idea that the stock market quickly provides the best available estimate of a company’s future profits – is widely accepted in financial economics. Harvard Business School Professor Michael C Jensen wrote in 1988 that, “No proposition in any of the sciences is better documented,” than the EMH.
Prediction markets offer opportunities to gamble on a wide array of outcomes, from sports contests to wildfires and wars.
One sign of its influence is that vast swaths of the investing public have abandoned actively managed mutual funds in favor of passive index funds, such as those invested in the S&P 500. Indexer Vanguard is the single largest shareholder in 19 of the 25 largest American corporations, a testament to Americans’ faith in the market (or, perhaps, their lack of faith in high-priced fund managers.)
Thanks to the creative genius of Wall Street, an astounding number of financial assets are traded on markets, from pools of mortgages to sitcom royalties to the life insurance payoffs of the elderly – all yield informative prices that provide insights into the future, courtesy of efficient markets.
From the stock exchange to the rest of the world
The Nobel-winning economist Robert Shiller is a friendly skeptic of the EMH but an optimist when it comes to the potential positive impacts of financial markets. His 2003 book, The New Financial Order, describes how pervasive information technology can enable far more expansive risk management to create a more secure and prosperous future.
It’s a hopeful vision in which better information allows livelihood insurance and income-linked loans to encourage people to develop their talents. At a grand scale, he proposes, “A new economic information infrastructure: new global risk information databases (GRIDs) to provide the information that would allow effective risk management.” GRIDs would enable people to hedge risks that elude insurance today.
In the most optimistic case, prediction markets provide a version of global risk information. You can visualize this futuristic world by visiting one of the online markets and viewing screens filled with probabilities associated with thousands of events, regularly updated as the market churns.
By creating an online platform to connect buyers and sellers 30 years ago, eBay turned the world into a garage sale. Now that it was easy to sell all those unwanted Pez dispensers and vintage clothes, everything in your home had an invisible price tag. Prediction markets promise to turn the world into an informed casino, connecting buyers and sellers of contracts on any kind of event and yielding accurate probability estimates as a byproduct. All the world’s events could become more predictable.
Truth Social began selling early access to its data feed of presidential posts for up to $100,000 a month – the better to know (and bet on) the future slightly before the competition.
But the analogy between prediction markets and stock markets is misleading. Stocks and bonds are backed by expected future income. That’s the essence of being a capital asset, and the reason why we encourage investing in the stock market. Markets for predictions are not an investment; there is no “future income” backing an event contract. Prediction markets are simply gambling halls, or, in some cases, insurance brokers.
This ambiguity seems to befuddle regulators. Is an event contract a security? No. Is it insurance? Not really. In the US, prediction markets are regulated by the Commodity Futures Trading Commission (CFTC), which treats bets … er, event contracts … as financial derivatives. “Derived” from what? State regulators and the CFTC are feuding over who should regulate prediction markets.
Prediction or self-fulfilling prophecy?
The presidential administration that came into office in January 2025 quickly moved to loosen restrictions on prediction markets, and the months since then have provided a rich buffet of cautionary tales. Suspiciously timed trading, which some believe came from inside the administration, has been a recurring motif.
In January 2026, on the verge of the US expedition to Venezuela to abduct its president, one anonymous user made $400,000 in profits off anonymous bets on Polymarket. The Iran invasion upped the ante, as millions in bets were placed shortly before the events in question. Even Donald Trump’s teleprompter operator got in on the act, winning $100,000 by “guessing” the words that the president would use in a speech.
Insider trading on prediction markets for government-related events was predictable but may not have influenced the events themselves. More alarming were cases in which bettors made the events come true, just as the Chicago White Sox threw the 1919 World Series. Bets on the high temperature in Paris are settled by a gauge on a tower at Charles de Gaulle airport. One intrepid bettor may have earned $20,000 by climbing the tower and blowing a hair dryer on the gauge.
But there are far less whimsical opportunities for betting. In January 2025, as wildfires swept Southern California, Polymarket had, as Wired magazine noted, almost 20 related events that people could bet on: “How many acres will the Palisades fire burn by Friday, three days after it ignited on a Tuesday? Will it reach Santa Monica by Sunday? When will it be 50% contained? Will the Palisades and Eaton fires be contained before February?” Homeowners buy fire insurance to hedge against tragedy, but when anonymous bettors can profit from arson, the situation reads very differently.
While no one has suggested that the US went to war on Iran to make money on Polymarket, 150 accounts placed bets on 27 February that the US would strike Iran the next day, earning hundreds of thousands in payoffs. Another anonymous account earned over $500,000 by betting that Grand Ayatollah Ali Khamenei would be removed from power just before his assassination. Thankfully, the US administration is universally acknowledged to be free of any conflicts of interest.
Friends in high places
The biggest prediction markets are Kalshi and Polymarket. Kalshi is a licensed financial exchange based in New York, regulated as a Designated Contract Market by the CFTC, with a primary focus on sports betting. Polymarket has two separate operations. In the US, it can host markets on sports events and macroeconomic indicators. Polymarket International, which includes trading on political, entertainment, and news events, is legally off-limits to US citizens, but there are rumors that it is possible to circumvent such restrictions on the internet.
Polymarket’s corporate structure is famously inscrutable. Polymarket International is incorporated and headquartered in Panama, a nation well-known for its transparency and rigorous regulatory scrutiny. Yet visits to its offices by NPR revealed that nobody was home, while Wired reports that former employees of the international unit admitted to working out of the Manhattan headquarters, seemingly in violation of a prior settlement with the CFTC.
Although Kalshi and Polymarket differ in several ways, one thing they have in common is Donald Trump Jr. He joined Kalshi as a paid advisor the month his father was inaugurated in 2025, receiving a $300,000 equity stake. Later that year, he joined the advisory board of Polymarket, where his VC firm 1789 Capital made an eight-figure investment.
In response to a query from the New York Times, his spokesman wrote: “The idea that Don, who has never worked in the government in his life, should cease working in the private sector and providing for his five children, just because his dad was elected president, is an absurd premise. The only conflict of interest that exists here is between the network of left-wing activists and their ideological allies in the media who keep using lies and baseless innuendo to smear Don.”
In other news, Truth Social, the Trump family’s social media platform, abandoned plans to launch its own prediction market, and will direct business to Crypto.com, another recent entrant to the prediction market industry. Truth Social also began selling early access to its data feed of presidential posts for up to $100,000 a month – the better to know (and bet on) the future slightly before the competition.
You don’t have to be Nostradamus to foresee that this will not end well.
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