Stop Betting on Prediction Markets: The Odds Are Stacked Against You
You could be going up against traders who have access to AI (and possibly inside information) that makes your chances of winning slim.
Last year, in my article Should Your Brokerage Firm Become Your Bookie? I advised anyone seeking to make wagers on random events to do so carefully.
Stick to a predetermined, and limited, amount of money, I warned. And use a financial institution separate from the ones holding your savings and securities accounts.
This helps you to avoid the possibility of dipping into your financial assets to wager on, say, an election in Brazil. You can make those kinds of bets, known as "event contracts," on "prediction markets."
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
We've now had a year to watch prediction markets become ubiquitous in the media. And I've changed my recommendation, though my earlier advice stands if you still want to venture into prediction markets.
But to you, the average person, reading this on your phone, laptop or at your desk: You. Should. Not. Bet. On. Prediction. Markets.
As they say in the opening line of the movie Rounders, "Listen… If you can't spot the sucker in your first half hour at the table, then you are the sucker."
Why? Because in prediction markets, the odds are stacked against you, your opponents are professionals with tools you don't have, and inside information is virtually a feature.
People who do this for a living believe you are the sucker. The numbers say they're right.
Who are you betting against?
In May, the Wall Street Journal published Prediction Bets Are (Mostly) a Losing Game (paywall). The article studied trades at Polymarket and Kalshi, two of the largest prediction markets.
At Polymarket, the numbers are sobering. The most sobering of all: Out of 1.6 million accounts studied, fewer than 2,000 accounts made 67% of the profits. In other words, 0.1% of the accounts won more than two-thirds of the money wagered. A significant majority of participants were net losers.
Kalshi informed the Journal that there are 2.9 unprofitable users for each profitable one based on a recent month's data.
What makes the profitable traders hard to beat?
What do the winners have that you probably don't have? Access to artificial intelligence that can analyze a betting proposition, determine the factors that could alter the odds, place a wager without human interference, close out that wager when the odds change and do so 24/7.
AI also adds speed that you can't match in terms of access to that information. Simply getting information early and reacting to it can be critical to changing the odds of any event outcome.
The sooner you find out that a star college quarterback has a concussion, the sooner you can place a bet against his team.
An AI tool can tell you a particular tennis player has difficulty with left-handed opponents, then factor in that information and place a bet against that player a microsecond after a lefty wins a match that will place him against that player in the next round.
Solely on a hypothetical basis, let's say someone paid $100,000 a month to receive access to information about prospective government activity a few seconds before that information was released to the general public.
I'd venture to say that, coupled with AI, those few seconds would give someone a distinct advantage in predicting the outcome of certain future events.
In short, you are betting against the pros.
Any other reasons for steering clear of prediction markets?
In theory, insider trading is forbidden in prediction markets. When discovered, insiders who improperly use information have their wagers voided, are subject to financial penalties and may be barred from the sites and even indicted.
Examples are government personnel with access to military intelligence and speechwriters who wager on whether a certain speaker will use certain words.
But the discovery mechanism and the enforcement of the ban on insider activity are difficult to identify and prove.
Some state regulators have tried to enforce state gambling laws and regulations against prediction markets.
Polymarket and Kalshi have deftly avoided state control over their operations by claiming that the individual event contracts they offer are exclusively regulated by the federal Commodity Futures Trading Commission (CFTC) to the exclusion of state gambling laws. The CFTC has sided with the Polymarket and Kalshi positions.
It is my view that the CFTC doesn't have sufficient staff or expertise to credibly undertake the necessary regulatory review. Indeed, the CFTC has lost a significant percentage of its personnel in recent years.
Further, since Donald Trump Jr. is a paid strategic adviser to Kalshi and sits on Polymarket's advisory board, and his investment firm has invested in Polymarket, it is difficult for me to predict that CFTC regulatory review would go against any positions taken by these firms.
Lessons from Brazil
My previous article offhandedly mentioned that it might be unwise to bet on the outcome of an election in Brazil.
We now have evidence that Brazil is on the precipice of financial ruin, and the poorest Brazilians are trying to dig out of rising debt by using prediction markets, and other online wagering apps, to make a big score.
It is not going well. The New York Times reports that online gambling is a major issue in the upcoming presidential election. Brazilians have lost about $7 billion gambling online, and the poorest bettors are digging themselves into the deepest holes.
Sometimes wisdom comes from a goat, a pig, a mouse and a comic strip. So before you open a prediction market account, or make a bet on an account you already have, ask yourself: Is all of life now one big grift? The comic strip Pearls Before Swine might have the answer.
My advice, though? Make a $10 bet with your Dodger-fan neighbor instead. Who do you like in the World Series?
Related Content
- Why Prediction Markets and Sports Betting Aren't Investing
- Why Invest In Index Funds When Prediction Markets Pay Big?
- Gambling vs Investing: How to Tell the Difference
- Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs In
- A Future Headline: Biff’s Investing Firm Cleans Up With AI
