When Donald Trump won his second presidential term in 2024, one of the big winners was prediction markets. They’d had him comfortably winning, whereas polls and pundits were calling a much closer race or a win for Democratic Party candidate Kamala Harris. The view was that prediction markets — thanks to the wisdom of the crowd — would always be right.
More on that in a moment. First, what are prediction markets?
Essentially this is when you are betting on an outcome. That outcome could be a presidential election, a sports game or even how many times Elon Musk will tweet over the next two days. As I am writing, Kalshi has almost 1-million active prediction markets you can bet on.
How the bet works is that there is a bid and an offer, and in a two-way market, you either buy or sell. Then, if it resolves in your favour, you collect 100c.
So if you’d “bought” Kevin Warsh to be nominated as the new Federal Reserve chair at 32c, you’ll collect 100c when Trump sends his nomination to the Senate for approval.
What’s important here is how the market resolves. Many people who placed money on Warsh were surprised to not have yet been paid out. Reading the small print is, as always, important.
Some markets will be multiway, such as the one on whom Trump will nominate as the new Fed chair. Here the winner gets the full 100c, with all other bets paying zero.
One of the selling points from the providers is to use these markets as a hedge of sorts.
Betting on how many times Musk tweets is more an indication of a gambling problem
For example, a few weeks ago you could have bet on how much snow would fall over the weekend in New York. Why would you care? Well, maybe you have a small business in New York, and a lot of snow will force you to close and lose sales. So you bet on snow falling, and if it does, you offset your lost sales with a winning bet.
Betting on how many times Musk tweets is more an indication of a gambling problem.
Sports betting is huge on the prediction markets. The US Commodity Futures Trading Commission tried to shut them down but lost its court case in 2024 and was refused leave to appeal.
That ruling effectively opened the way to betting on anything, and that brings me back to the wisdom of the crowd.
In the days leading up to Trump announcing his pick for Fed chair, Warsh was at 32%, with Rick Rieder at 49% and Judy Shelton at 4%. The crowd was wrong.
Another concern is volume; with some so illiquid, no bet above $10 is possible. That said, you do sometimes find complete mispricing that may present an opportunity, and you also find price differences between different platforms.
I haven’t committed any money yet, but I am watching with interest — especially within my field of expertise: markets and economics.
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