Prediction markets, like Kalshi and Polymarket, allow users the opportunity to bet on just about any real-world event, from the trivial to the monumental, including major geopolitical conflicts and elections here at home.
Economist David Bieri explains how these markets work, why they appeal to a distinctly American economic mindset, and the risks that they pose for both users and broader structures.
From the growth of day trading to the widespread use of smartphones, technology has lowered the threshold for everyday Americans to tap into markets that were previously accessible only to high-level specialists or required a lot of effort to participate in. Combined with the growing popularity of the “investor mindset,” Bieri says these changes have helped create the current landscape.
“It’s part of the gamification and digitization of financial markets, which turn everything now,” said Bieri. “There’s been a reduction of friction for participating in risky things that could get you killed, or lose your money if you do them underground. Now everyone can do them. We’re at a unique junction where technology meets that mindset.”
But unlike purchasing a stock, there is no investment in anything. Instead, participants are relying solely on their ability to predict an outcome. For Bieri, that’s a fundamental shift, one he sees tied to the cultural fascination with being rich as an achievement in and of itself, and the ability to “make money in your sleep.”
“Now everybody can take part in these markets just to make money, not because they’re invested in anything else,” he said. “There’s no real skin in the game — no stake in a company, no ownership of an asset, no productive activity underneath the wager. That’s a textbook moral hazard: when you strip away any connection to underlying value, the only thing left is the bet itself. And that’s where the platform owners are the ones getting rich.”
Prediction markets make their money by taking a small cut of every transaction. According to Bieri, this creates a fundamental misalignment: the platforms have no commercial incentive to police insider trading and every incentive to encourage more action, more contracts, and bigger bets.
“These platforms have seen large bets placed by newly-created accounts shortly before major geopolitical events, like the U.S. strikes on Iran and the arrest of Venezuelan President Nicolás Maduro, raising questions about whether traders may have acted on privileged information,” Bieri said.
The death of Iran’s leader, Ayatollah Ali Khamenei, has provided perhaps these markets’ sternest test so far. Kalshi is refusing to pay out “winners” in the $54 million market on bets that he would be “out as Supreme Leader” by a certain date. The platform froze the market, saying the site doesn’t allow transactions directly tied to death.
For Bieri, this example illustrates the broader challenge of regulation struggling to keep up with these platforms.
“The issue of the regulatory state limping behind the frontier is exactly what fuels innovation,” he said. “The history of a fragmented regulatory system in the U.S. compounds the problem, as different regulatory agencies fight for domain over spaces. But the whole regulation of FinTech companies is still unresolved.”
About Bieri
David Bieri is an associate professor in the School of Public and International Affairs and an associate professor of economics at Virginia Tech. Bieri has been covered by outlets such as The Wall Street Journal, The Washington Post, TIME, Newsweek, CNN, and Marketplace, among many others. He previously worked in investment banking and served in senior roles in central banking. View Bieri’s full bio.
Interview
To schedule an interview, contact Noah Frank in the media relations office at nafrank@vt.edu or 805-453-2556.
