Let prediction markets predict – elections, sports, and other topics

In the 2024 presidential election, one of the big winners was prediction markets. During the weeks leading up to election day, venues such as Kalshi, PredictIt, and Polymarket – in which participants purchased contracts on outcomes of elections and other events – consistently pinpointed Donald Trump as the winner of the presidential election. Many pollsters, by contrast, showed a tossup. Some prominent polls – such as the Des Moines Register poll by J. Ann Selzer that showed Kamala Harris winning Iowa (a state that Trump ended up carrying by 13 points) – were so off the mark that many suspected partisan bias was in play.

The solid performance of prediction markets vs. the lackluster performance of polls in the presidential election vindicated economists who argue that the most accurate forecasts are those with money riding on them. Prediction markets enable speculative contracts on political, economic, and even cultural events, while functioning like traditional commodity futures exchanges that match traders speculating that prices of crops will go up or down.

Their election performance has also led to increased demand for prediction markets to expand into other subject matter – a demand that these venues are fulfilling in terms of contracts for outcomes of financial events such as interest-rate setting, entertainment ceremonies such as the Academy Awards, and sports performance of teams and athletes.

Scholars across ideological lines have argued that prediction markets are essential in providing real-time information to businesses, policy makers, and ordinary citizens. Jason Furman, Harvard economist and chair of the Council of Economic Advisers in the Obama administration, recalled the utility of prediction markets to him as a government official and academic researcher.

“In the White House, I, along with other members of the economic team, would regularly refer to prediction markets on electoral outcomes and specific events to help inform our understanding of how political and economic developments would affect economic policymaking,” Furman said in comments to the Commodity Futures Trading Commission (CFTC). “In understanding the risks of a government shutdown or debt limit showdown, for example, it would be helpful to understand what informed traders with money at stake would expect – a method of understanding probabilities that research has consistently shown is superior to other ways of summarizing and updating based on information.”

Yet despite the bipartisan acclaim for prediction markets, the Biden administration – which weaponized so much of financial regulation – did everything it could to shut these venues down. Just a few months after Biden nominee Rostin Benham was confirmed to chair the CFTC – the federal agency in charge of future and derivatives, including contracts on the outcome of events – began waging war against prediction markets. This opposition could possibly be explained by the pro-regulatory tilt of that administration, and the fact that some prediction markets utilize cryptocurrency, for which the Biden administration had a particular aversion that led to weaponized enforcement against the industry.

Yet Benham also seemed to have an almost religious level of fervor against these markets, particularly those that offer contracts on elections. “Contracts involving political events ultimately commoditize and degrade the integrity of the uniquely American experience of participating in the democratic electoral process,” Benham said.

The Biden-Benham CFTC even attempted to reverse mildly deregulatory actions from the Obama administration. For instance, in 2014, the CFTC under Obama granted the request of PredictIt for a no-action letter assuring that the venue would not be in violation of laws by offering event contracts on the outcome of elections. But in 2022, the Biden-Benham CFTC withdrew this no-action letter, signaling likely enforcement to punish the firm for offering election-prediction contracts. Fortunately, a 2023 ruling of the Fifth Circuit Court of Appeals enjoined such action from the regulator. 

The prediction markets venue Kalshi beat back Biden-Benham’s bad CFTC policies in court as well. In 2023, the CFTC ordered Kalshi to cease offering event contracts on the question of control of Congress. Yet in September 2024, Judge Jia Cobb, a Biden appointee to the United States District Court for the District of Columbia, ruled that the CFTC’s order denying Kalshi’s contracts exceeded the CFTC’s powers under the law. After this ruling admonishing the CFTC for exceeding its bounds in going after prediction markets, Kalshi resumed offering the congressional control contracts and expanded its offerings to create prediction markets for many other topics.

In January, Kalshi expanded its prediction markets to cover outcomes in sports, including contracts on the performance of teams and athletes in specific games and over the season. This has raised the ire of established casinos, who have formed what economist Bruce Yandle called a “bootlegger-Baptist” coalition – referring to the alliance of makers of illegal booze with anti-alcohol groups to keep prohibition of alcohol alive – with longtime progressive opponents of prediction markets.

In calling for the CFTC to ban prediction markets related to sports – following its earlier unsuccessful attempt to shut down election prediction markets – the progressive group Better Markets claims in comments to the agency that “if the CFTC fails to take decisive actions, it risks opening the floodgates to speculation untethered from any legitimate economic purpose, effectively turning financial markets into federally regulated sportsbooks.”

Yet Brian Quintenz, former CFTC commissioner and President Trump’s nominee for chairman of the CFTC, has stated that sports prediction markets – although enabled by Internet and payment technology – fit squarely into the definition of a commodity exchange generally allowed by federal law. In 2021, Quintenz wrote that “a football game” was a commodity under the definition of the Commodity Exchange Act, because it is an “occurrence” that “is 1) both beyond the control of the relevant parties to the contract…and 2) associated with a financial, commercial, or economic consequence.”

Prediction markets function like derivatives and futures exchanges – rather than casinos – in that the prices are set by buyers and sellers. Prediction market venues do not take bets from their customers, as casinos do, but match those speculating on different outcomes of an event. Thus, they function like a traditional commodities exchange in which traders speculating that the price of a certain crop will rise are matched with other traders speculating that it will fall.

And Quintenz and others have made the point that since sports outcomes do indeed have economic effects, sports contracts offered by prediction markets could help affected businesses hedge risks in the same way traditional futures and derivatives contracts do for agriculture and other industries. As Quintenz states, “contracts relating to the outcome of sporting events could now have a legitimate economic and hedging purpose for businesses.” A comment letter to the CFTC from Robinhood, which now offers its customers access to Kalshi’s sports prediction markets, points out that many small and large businesses centered around sports teams “including stadium vendors (e.g., companies such as Aramark), merchandise sales, nearby restaurants, hotels and bars, all have risks related to whether the Lakers are playing well – a commercial risk that they could decide to hedge.”

As a libertarian organization, CEI has long supported liberalization of sports betting, as we support adults being able to pursue pleasures of their own choosing. Now, with sports betting legal in nearly 80 percent of US states, it is hard for anyone to argue that prediction markets offering contracts on sports outcomes will unleash an epidemic of gambling. The racehorse, to add Kentucky Derby imagery to the proverbial saying, is already out of the barn.

What the introduction of sports events contracts will do is lead to greater price discovery and offer the many businesses focused on sports a potential way to reduce risk. Regarding sports, elections, and other topics, it’s time to let prediction markets predict.

CEI Research Associate Ari Patinkin contributed to this post