In business, uncertainty is usually a liability. But some companies are turning it into a product. Online platforms, such as US-based Polymarket and Kalshi, which allow users to make wagers on all sorts of binary public events, are thriving. In just two years, punts placed per month — on topics ranging from whether US President Donald Trump will acquire Greenland before 2027, to whether Taylor Swift will announce she is pregnant before the end of March — are estimated to have ballooned 130 times to over $13bn. It is tempting to dismiss these activities as mere gambling, or as a symptom of a society that has pushed financialisation to its limits. But prediction markets could yet serve a useful financial function, with careful policing.
In theory, they harness the wisdom of crowds by forcing punters to put money behind their beliefs. In doing so, they can help to price risk in markets and provide investors and companies with unique opportunities to hedge against an array of events in real time. Their appeal for forecasting is particularly strong in an era of information overload and geopolitical upheaval. Polymarket, a crypto-based platform, for instance accurately predicted a decisive win for Trump in the run-up to the 2024 US election, while opinion polls portrayed a much tighter contest.
But prediction markets still have a long way to go if they are to become a trusted part of the financial infrastructure. For starters, the industry is plagued by issues of insider trading and manipulation. Hours before the US announced the exfiltration of Nicolás Maduro, an anonymous Polymarket user curiously bet that Venezuela’s president would fall. They made more than $400,000. Reasonably, some US lawmakers want to formalise constraints on platform use for officials, political appointees and executive branch employees.