The dark side of prediction markets is getting even darker

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Gambling has become legal in nearly every U.S. state. Whether it is buying lottery tickets, loading money into video slot machines, playing casino games like blackjack, craps or roulette, or betting on sports, opportunities to wager on events with uncertain outcomes has become widely available.

Of course, betting does not need to be based on the outcome of games of chance or sporting events. It can literally be on anything. Moreover, gambling becomes tarnished when the outcomes are not uncertain, but rather predetermined or controlled by one or more people in positions of power or influence.

Welcome to prediction markets, which facilitate such gambling. They offer opportunities to wager on the occurrence or timing of national or world events. Historically, prediction markets have been used with some success to predict who will win elections, much like what polls are designed to do.

Two highly visible prediction market platforms available in the U.S. are Kalshi and Polymarket.

Kalshi is registered with the Commodity Futures Trading Commission. Polymarket has a more complicated history. Its U.S. arm, Polymarket U.S.,  is registered with the commission, whereas its international arm is not. The venture capital group 1789 Capital, in which Donald Trump Jr. is a partner, is one of its investors, tangentially tying the company to President Trump.

Registration with the commission is necessary to ensure that a prediction market offers participants a transparent platform and follows the requisite trading rules. Yet when it comes to world events, what does transparency even mean?

People who place bets on prediction market platforms win if they correctly foresee the outcome of any event offered on the platform. Yet some such events are typically not random; rather, they are determined by people in positions of power or influence, based on their actions or even just their announcements.

For example, people can place bets on geopolitical events, like when the Strait of Hormuz will return to normal operations. When the president decided to sign an agreement to end the war with Iran back in mid-June, a window to reopen the Strait of Hormuz appeared, something over which the president had a measure of control . Renewed fighting has resulted in the strait once again closing. Today, both the U.S. and Iran claim control.

Because geopolitical events are not purely random, anyone who knows what the president or any world leader will do or when they can use such inside information and win bets on prediction markets. Reports of such insider information are ubiquitous, with sizable bets being made and won based on access to classified non-public information.

The Senate passed a rule banning all senators and their staff from betting on prediction markets, a welcome and necessary announcement. Having the House do the same, as well as members of the executive branch and their families, would be appropriate as well. Going even further, states are passing legislation to ban prediction markets from operating within their borders. How widespread this becomes remains to be seen, given the legal battles that such laws are certain to generate.

Prediction markets are no longer acting as betting markets on random events, but rather, capturing future information based on insider information that only some people may have access to. Betting market platforms, like any gambling entity, must balance the money wagered on both sides to stay in business; insider information is akin to knowing beforehand in sports that a star athlete plans to intentionally perform poorly in a game, or card counting in blackjack, except with greater certainty. Indeed, those using insider information are almost guaranteed to win their bets, not just biasing the odds in their favor.

Given the president’s record during his second term of moving markets with announcements on tariffs, one option that betting markets have is to not accept wagers on events from people who have a clear conflict of interest. For example, Kalshi suspended accounts of three congressional candidates for placing bets on their own race. Such actions would apply to any future outcomes that can be manipulated by announcements or actions of one or more people. Without such guardrails, prediction markets lose their credibility, and perhaps even face financial strains if their spread is insufficient to cover their losses based on insider trading.

Kalshi and Polymarket are in the business to make money, so they are more likely to set odds and payouts in a manner that captures insider information, ensuring that they remain profitable.  This makes prediction markets even more tainted than games of chance and sports gambling, where the odds of winning — and the associated payout — are typically more transparent.

Prediction markets are not going away any time soon. Society has grown an insatiable thirst for gambling that is no longer restricted to traditional games of chance and sporting events. Every societal and political event has become an opportunity to create a betting market. The number of betting opportunities surrounding the president hovers around 250, including some in which he has direct influence to determine the outcomes.

This means that those placing bets in prediction markets are not predicting the outcome of a random event, but rather, knowing of a calculated action of people in power to make decisions, obfuscating the foundations that define prediction markets and tarnishing the information that it communicates. It effectively allows the digital economy to transform the entire world into a gambling casino, something that no one could have foreseen even 10 years ago.

Sheldon H. Jacobson, Ph.D., is a professor of Computer Science at the University of Illinois Urbana-Champaign. He applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.

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