12 ms·

The microstructure of wealth transfer in prediction markets

233 points by jonbecker 9mo ago

jonbecker 9mo ago
tl;dr dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025) core findings: longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time. wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%). optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value. category variation: finance markets are efficient (0.17% maker-taker gap) while high-engagement categories like media and world events are inefficient (>7% gap). mechanism: makers do not win by out-forecasting takers. they win by passively selling "yes" contracts to optimistic bettors
- KPGv2 9mo ago
  This reminds me of the old scheme where if you just bet against ND football you'd make money because ND fans were so rabid that the "ND is good" positions became overpriced.
  - hbarka 9mo ago
    Yes, in the study they pinpointed this beautifully: “A fan betting on their team to win the championship is not calculating expected value; they are purchasing hope.”
- tasuki 9mo ago
  I wish I had read the comments (ie your comment, as it's the only one now) before reading the article!
- TZubiri 9mo ago
  I don't think that makers sell "yes" they take both ends of the bet, but they make more money on selling yes,apparently.
- snovv_crash 9mo ago
  The question is how long this alpha continues to exist...
- hbarka 9mo ago
  > Optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value. This is interesting and makes a statement about positive or negative orientation in human psychology. Also, couldn’t the bets just be worded in the double negative instead of the affirmative to influence the optimism bet?
LeifCarrotson 9mo ago
I'm a little confused by the "Yes" versus "No" asymmetry. For example, one of the top trending ~~bets~~ markets right now is on whether Miami or Indiana will win the NCAA football championship tonight. You can either take "Yes" on Indiana at 74c, or "No" at 27c, or you can take "Yes" on Miami at 27c or "No" at 74c. Or, there's another potential outcome - you can also bet on a tie at 10c yes/91c no. Is this research suggesting that an optimistic Miami fan can somehow get a better return by buying "No" on Indiana than a "Yes" on Miami? Why is Kalshi structured with these yes vs. no options for all outcomes?
- postflopclarity 9mo ago
  > Why is Kalshi structured with these yes vs. no options for all outcomes? it's basically how they do margin. otherwise you wouldn't be able to sell / post asks without already having a long position. for kalshi, it's actually one single security in the background they just present it as two order books (but really it's one). for polymarket, they are two distinct products that trade separately, and technically could have arbitrage between them. although in practice they're normally priced correctly to sum to 1 (or 1.01)
  - denotational 9mo ago
    It’s not really margin since there’s no leverage: the potential loss associated with the bet has to be deposited, so it’s fully collateralised.
    - postflopclarity 9mo ago
      right, I guess I should have said it's what they have _instead_ of letting users trade on margin.
- pants2 9mo ago
  Part of this perceived arbitrage is the fee structure. Kalshi has a weird transaction cost structure but taking advantage of that 1c arb probably costs you 2c in fees to Kalshi, so nobody does it.
TaylorPhebillo 9mo ago
How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?
- computerphage 9mo ago
  The usual thing is that the market ends up around $0.95 for things like that, if the actors are all solid investors. It only takes one overly enthusiastic yes buyer to break that ceiling, the smart money won't "correct" it down to $0.95 There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
  - lowbatt 9mo ago
    that's correct. Also Kalshi does pay out interest on, and Poly does on a few markets
- samvimes 9mo ago
  Kalshi pays interest on open positions
- pants2 9mo ago
  Interest on open positions. Polymarket pays about 4.00% annualized holding rewards on eligible markets/positions (not all). Kalshi pays about 3.25% APY on cash plus open positions (collateral). Edit to add that on non eligible markets your theory is correct, for example: https://polymarket.com/event/will-jesus-christ-return-before-2027 https://polymarket.com/event/will-jesus-christ-return-before...
jebarker 9mo ago
I wonder how much of the activity on prediction markets these days is competing LLM scripts? I would guess the overlap in prediction market punters and AI boomers is high.
- lowbatt 9mo ago
  It'd be a good way to lose money at the moment. Probably not too far off in the future it would make sense though
  - MarkusQ 9mo ago
    Would you like to bet on that? :)
  - mormegil 9mo ago
    LLM-superforecaster parity projected to late 2026 (and LLMs now outperform non-expert public participants) according to https://forecastingresearch.substack.com/p/ai-llm-forecasting-model-forecastbench-benchmark https://forecastingresearch.substack.com/p/ai-llm-forecastin...
kwar13 9mo ago
This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability. In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. Slots are also unskilled games, prediction markets clearly some participants have a clear market edge, thus not efficiently priced.
- deleted 9mo ago
  [deleted]
- kibwen 9mo ago
  > In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit. And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a tacit admission that our markets aren't even remotely efficient, and that includes predictions markets. Efficient, rational markets are the exception, not the rule.
  - Retric 9mo ago
    You misunderstood a basic principle here. In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.
    - kibwen 9mo ago
      If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question. If that sounds absurd, then yes, that's the point: our assumptions about what it takes in order to achieve an efficient market approaches the absurd. Which isn't to say that markets aren't often useful, especially compared to the alternatives, but rather that appeals to rationality don't survive contact with the enemy.
simonw 9mo ago
I'm getting some really skeezy ads for prediction markets on TikTok at the moment, the message is effectively "hey, are you broke? earn $50+/day on Kalshi!"
- renewiltord 9mo ago
  The Polymarket twitter accounts are massive ragebaiters. This is sports betting with some two minutes hate added in. I have to say I was this huge fan of the idea and I didn’t anticipate it would happen like this.
  - LeifCarrotson 9mo ago
    I have occasionally tried checking Polymarket and Kalshi to get an idea of the general political/cultural/technological consensus on various issues that are difficult to research otherwise, eg. "what are the chances that the Senate changes hands in the 2026 midterms?" People have thought about it enough to wager a million dollars and the consensus is at about 1/3. I have this abstract prediction market in my head, each bet placed by some statistically average person with diverse experiences and exposures from my own bubble, who carefully considers their information and puts their two cents into the pot, and I assume that by adding all our ideas together we form some sort of combined intelligence which is more insightful and reliable together than any individual pundit could be. And then I go back to the home page, and see all the rabid sports fans, and realize that these bets are not being placed by deep thinkers.
    - anon84873628 9mo ago
      Election polling, analysis, and prediction is a mature industry with plenty of reliable commentators who can help answer your question. Here is just one example: https://www.cookpolitical.com/analysis/senate https://www.cookpolitical.com/analysis/senate Portrayal to the contrary is mostly due to non-experts pumping their own ego, or deliberate media spin.
    - asdff 9mo ago
      Polymarket is currently predicting a 3% chance of Christ returning by 2027 https://polymarket.com/event/will-jesus-christ-return-before-2027 https://polymarket.com/event/will-jesus-christ-return-before...
yieldcrv 9mo ago
To me this is all the more reason to get regulatory gatekeeping out of the financial markets If the odds in some financial products are worse than gambling while everyone can access gambling, then people should stop making a distinction under the guise of protecting investors it just drives investors to actual gambling because they cant get the exposure they were already looking for
- JumpCrisscross 9mo ago
  > it just drives investors to actual gambling because they cant get the exposure they were already looking for This argument gets trotted out by Wall Street every decade or so, usually under the guise of "democratising" some piece of finance. It's almost always bunk. Most investment capital is looking for safe returns. It's not competing with gambling. Even within the high-risk end of finance, the game is in turning that high risk into above-market but predictable returns through portfolio mechanics. (Fuckups aside, you can't generally portfolio mechanic your way out of the negative expectated value of a lottery ticket.) More simply: the notion that we need to increase risk and profitiabilty for intermediaries in investments to keep people from gamblig is a false economy. Gamblers are seeking a different thrill from what financial markets are designed to provide. To the degree we have a problem, it's in letting our markets look more like casinos. > exposure they were already looking for Broadly speaking, if you want exposure to the economy you're investing. If you want exposure to a number that goes up, you're gambling. This is an overly-simplistic delineation. But it works for first-order estimates.
  - terminalshort 9mo ago
    The same financial products are used in both gambling and smart investing. The canonical example here being options. And the restrictions on what the public can and cannot invest in are complete bullshit. You can't buy shares in a series A startup because that is deemed to be too risky for anyone who is not an "accredited" investor ("accredited" here literally means rich). But anyone who wants to can bet on sports, go to a casino, or buy a 2x levered VIX ETF.
    - 9mo ago
Lucasjohntee 9mo ago
[dead]
bs7280 9mo ago
I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game. The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.
- sysguest 9mo ago
  +1 if you're not the person-in-complete-power, your bet is really likely to be 'rigged' against you I'd rather play dice or buy lotteries
- roflyear 9mo ago
  well, at least for really odd ones - like the china example - the liquidity is (probably) going to be really low. you need people buying both sides to make money. But for big events/talked about stuff/etc ofc this is not true.
  - bs7280 9mo ago
    Again - Its not the money I care about, its what people are willing to do to make it.
    - eru 9mo ago
      If there's not much money to be made (because of illiquidity and adverse selection keeping market participants out), then there's not much incentive for people to do weird things.
- Buttons840 9mo ago
  It's a national security issue too. Somebody poor grunt who chose to earn a living by laboring (which has proven to be much less effective than being born with money) will be putting fuel in the bombers and thinking "I could just make an anonymous bet..." It's a national security issue. We saw this with the Venezuela attack. A flurry of trading and someone made $400,000 for placing a bet mere hours before the "surprise" attack. https://www.pbs.org/newshour/nation/a-400000-payout-after-maduros-capture-put-prediction-markets-in-the-spotlight-heres-how-they-work https://www.pbs.org/newshour/nation/a-400000-payout-after-ma...
Lucasjohntee 9mo ago
[dead]
__MatrixMan__ 9mo ago
I hope we manage to leverage prediction markets to actually achieve goals rather than just making a casino out of it. For instance, if you spot malware in a commit you could bet heavily against it being merged, and that would attract the maintainers' attention, and they'll see what you see and not merge it, and you get paid for the code review--that money would come from whoever bet that it would get merged, which you could require be the author of the malware. I haven't worked it out entirely but it seems that there are opportunities to build games that reward dilligence and transparency and penalize deception and spam.
- pawelduda 9mo ago
  Why not just bet heavily against and then inform maintainers? By just betting on it instead it makes you look like you, or someone you know planted the malware
  - __MatrixMan__ 9mo ago
    That is what I meant to say, that you'd inform the maintainers along with your bet against the commit. In this thought experiment I assumed that the maintainers are already being spammed by AI so heavily that the bet is necessary to get their attention. (Neal Stephenson had something similar going in in Anathem, he called them "bogons".) In the case where you're betting heavily in favor of a commit, maybe because you've reviewed it and think it's good, maybe because it contains malware you want to inject... you'd be attracting reviewer attention to that commit because if they can talk the maintainers out of it they end up with more of your money. Probably the best strategy for a malicious committer would be to sneak through a low value nothing-to-see-here commit, because the low bet would not attract extra reviewer attention, so the maintainers have to set it high enough that it still incentivizes review. I don't want to live in this world, by the way, I'm just afraid we might have to.
    - jamiepinheiro 8mo ago
      I was thinking of a similar idea to this, but for news/tweets/posts. As a consumer of media, I might decide to only read media with $x staked, so AI media factories need to be willing to stake that much to reach audiences, and will get penalized when they are wrong… I imagine a hard problem is building a system to resolve these markets.
jpmattia 9mo ago
Something that appears to be missing: Certain events attract "advertising" types of bets. E.g. There is value in making a candidate appear to be a leader, so dedicating dollars to swinging the market is more of a form of advertising than an intelligent bet. So it would be interesting to measure the inefficiencies of various bets vs the total market value in that bet. e: Although full disclosure, I did not pick apart the entire paper. Maybe it's buried in there.
- jonbecker 9mo ago
  super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption." i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.
  - jpmattia 9mo ago
    > but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap) I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket. But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed? In any case: Thanks for a very interesting paper!
    - jonbecker 9mo ago
      If we weight by contracts purchased the gap is 1.02%, dollar weighted the gap is 1.00%. I'm glad you enjoyed the paper :)
      - jpmattia 9mo ago
        [I'm still thinking about this a day later!] I think an additional table/graph of how large-bet performance vs small-bet performance would be interesting in general, as well as broken out by market type. It kinda answers of the question: Are large bets equal to smart money? or are they equal in "smartness" to small bets?
Majromax 9mo ago
The analysis is interesting, but I think it ignores a few factors: 1. The article mentions the bid/ask spread for contracts, but I believe that Kalshi also has its own fee structure. Small edges (an expected loss of 0.57¢ on a 1¢ contract implies an expected gain of 0.43¢ on a 99¢ contract, or a 5.75ppt edge) can be easily eaten by even small fees, and liquidity provision is all about small edges. 2. The article ignores the time value of money, and contracts take time to resolve. If a contract won't resolve for six months and the risk-free rate is 5%, then buying a "sure thing" over 97.5¢ is a loss net of otherwise earnable interest. 3. Long shots offer greater implied leverage to bettors, making them more attractive. This is still (sometimes) an exploitable mispricing, but it's closer to the well-understood "bet against beta" factor. (Edit to add) Also, I think their explanation of the non-returns on finance is lacking: > Why is Finance efficient? The likely explanation is participant selection; financial questions attract traders who think in probabilities and expected values rather than fans betting on their favorite team or partisans betting on a preferred candidate. The questions themselves are dry ("Will the S&P close above 6000?"), which filters out emotional bettors. Financial contracts are the ones that are most perfectly hedges with existing markets. "Will the S&P close above X?" is a binary option, after all, so it's comparatively easy for a market-maker to almost perfectly offset their Kalshi positions with opposite positions in traditional markets.
- postflopclarity 9mo ago
  on point 1, an important thing to know is that these markets have a non-linear fee structure where the rate is higher near 0.5 and lower near tail prices
  - Majromax 9mo ago
    True, but from the pdf it seems like the fee charged of market makers is 1.75¢ × P × (1-P) per contract. Near P=0 that's approximately 1.75% of the notional amount invested, but near P=1 that's approximately 1.75% of the potential gain. As I read it, the implication is that a market maker in the high-P regime needs to still have an expected edge of 1.75% to profit net of fees, which means that the 'maker return' table in this article is net negative after fees for all categories save for entertainment, media, and world events.
czhu12 9mo ago
I have no background in financial markets at all, but it strikes me that in markets like this, the "house" should be insiders right? The Maduro capture had an insider profit something like 400k. How would one go about understanding how that impact efficient markets? Could you use inefficient markets as a predictor of great volumes of insider trading?
danny_codes 9mo ago
I feel we need a term for these attempts to paint gambling as something other than gambling. Or just proper enforcement for gambling platforms like "prediction markets". Personally I find it disappointing to see so many people wasting their time on this stuff. I'm sure Coplan, for example, could be a productive member of society, but instead chooses to waste his time on stupid stuff like Polymarket.
- fasterik 9mo ago
  Prediction markets perform the valuable function of information aggregation, at least in theory. When there is a financial incentive to make a correct prediction, the market should converge on the probability an ideal observer would assign to the event. Of course in practice, there are issues like low trading volume, market manipulation, etc. And whether or not a particular market is performing better than, say, super-forecasters or experts in a given field is an empirical question. That said, it seems a bit excessive to dismiss prediction markets as merely gambling platforms that add no value to society.
codexon 9mo ago
Has anyone noticed a lot of polymarket posts on their X (formerly known as twitter) feed claiming to be making a fortune? It makes me feel like its some kind of coordinated guerilla marketing scheme.
YuukiRey 9mo ago
I’m surprised by the somewhat positive comments. I thought this was just a chance for insider trading without repercussions. If I work at $corp and know the hotly anticipated whatever is announced tomorrow, I can finally cash in on that knowledge. And the people losing their life savings on gambling now have one more tool. But what do I know. I’m probably oblivious to what greatness those Truth Engines will enable.
pwagland 9mo ago
An interesting article, however my question is technical. In the "The Mechanism of Extraction" section, how is that image made? It is nicely laid out, and has a nice "hand-drawn" feel. This is a good format for many technical drawings, but I have not found any tools that could create this.
- frutiger 9mo ago
  Excalidraw
- LandR 9mo ago
  Looks a bit like excalidraw. It's not, but it's pretty similar in look. https://excalidraw.com/ https://excalidraw.com/
misja111 9mo ago
I don't follow this part, can somebody maybe explain? > Yet on Kalshi, a CFTC-regulated prediction market, traders have wagered vast sums on longshot contracts with historical returns as low as 43 cents on the dollar. On prediction markets traders can bet both sides. E.g. on Polymarket I can currently bet that Greenland will be acquired by USA before 2027 and get 4:1 odds: or I can bet that this doesn't happen, and give 4:1 odds. If these odds are off, doesn't this mean that one side gets a bad return on investment, however the other side gets an equally good return? On balance the average return on investment by traders should just be 100 cents minus the margin of the prediction market, which tends to be only a few percent.
- tim333 9mo ago
  >On prediction markets traders can bet both sides In fact traders have to be there for both sides. The article means approximately that on 1c bets on unlikely things the people betting 1c to get a dollar if it happens do worse than those betting 99c to make a dollar if it doesn't happen. I'm not sure that means betting 99c to make a dollar is a great business though - your money is tied up, often the volume is low so if you can only bet say $99 to win $100 it may not be worth the hassle to make $1, and you are vulnerable to the bettors knowing something you don't - maybe the unlikely event isn't really that unlikely but you don't know.
WiSaGaN 9mo ago
A market maker needs a premium to provide liquidity. If all else is equal, why would they take on execution time risk? This is a universal feature of continuous-trading Central Limit Order Books (CLOBs), not something unique to prediction markets.
_def 9mo ago
> When the topic is dry and quantitative (Finance), the market is efficient. When the topic allows for tribalism and hope (Sports, Entertainment), the market transforms into a mechanism for transferring wealth from the optimistic to the calculated. I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism,
- buellerbueller 9mo ago
  >I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism where is your paper?
  - pinkmuffinere 9mo ago
    Irrational Exuberance by Robert Shiller
    - buellerbueller 9mo ago
      I'll allow it!
infinitewars 8mo ago
It should be obvious why Peter Thiel started Polymarket and also Palantir.

233 points by jonbecker 9mo ago

tl;dr dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025) core findings: longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time. wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%). optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value. category variation: finance markets are efficient (0.17% maker-taker gap) while high-engagement categories like media and world events are inefficient (>7% gap). mechanism: makers do not win by out-forecasting takers. they win by passively selling "yes" contracts to optimistic bettors

KPGv2 9mo ago
This reminds me of the old scheme where if you just bet against ND football you'd make money because ND fans were so rabid that the "ND is good" positions became overpriced.
- hbarka 9mo ago
  Yes, in the study they pinpointed this beautifully: “A fan betting on their team to win the championship is not calculating expected value; they are purchasing hope.”
tasuki 9mo ago
I wish I had read the comments (ie your comment, as it's the only one now) before reading the article!
TZubiri 9mo ago
I don't think that makers sell "yes" they take both ends of the bet, but they make more money on selling yes,apparently.
snovv_crash 9mo ago
The question is how long this alpha continues to exist...
hbarka 9mo ago
> Optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value. This is interesting and makes a statement about positive or negative orientation in human psychology. Also, couldn’t the bets just be worded in the double negative instead of the affirmative to influence the optimism bet?

LeifCarrotson 9mo ago

I'm a little confused by the "Yes" versus "No" asymmetry. For example, one of the top trending ~~bets~~ markets right now is on whether Miami or Indiana will win the NCAA football championship tonight. You can either take "Yes" on Indiana at 74c, or "No" at 27c, or you can take "Yes" on Miami at 27c or "No" at 74c. Or, there's another potential outcome - you can also bet on a tie at 10c yes/91c no. Is this research suggesting that an optimistic Miami fan can somehow get a better return by buying "No" on Indiana than a "Yes" on Miami? Why is Kalshi structured with these yes vs. no options for all outcomes?

postflopclarity 9mo ago
> Why is Kalshi structured with these yes vs. no options for all outcomes? it's basically how they do margin. otherwise you wouldn't be able to sell / post asks without already having a long position. for kalshi, it's actually one single security in the background they just present it as two order books (but really it's one). for polymarket, they are two distinct products that trade separately, and technically could have arbitrage between them. although in practice they're normally priced correctly to sum to 1 (or 1.01)
- denotational 9mo ago
  It’s not really margin since there’s no leverage: the potential loss associated with the bet has to be deposited, so it’s fully collateralised.
  - postflopclarity 9mo ago
    right, I guess I should have said it's what they have _instead_ of letting users trade on margin.
pants2 9mo ago
Part of this perceived arbitrage is the fee structure. Kalshi has a weird transaction cost structure but taking advantage of that 1c arb probably costs you 2c in fees to Kalshi, so nobody does it.

TaylorPhebillo 9mo ago

How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?

computerphage 9mo ago
The usual thing is that the market ends up around $0.95 for things like that, if the actors are all solid investors. It only takes one overly enthusiastic yes buyer to break that ceiling, the smart money won't "correct" it down to $0.95 There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
- lowbatt 9mo ago
  that's correct. Also Kalshi does pay out interest on, and Poly does on a few markets
samvimes 9mo ago
Kalshi pays interest on open positions
pants2 9mo ago
Interest on open positions. Polymarket pays about 4.00% annualized holding rewards on eligible markets/positions (not all). Kalshi pays about 3.25% APY on cash plus open positions (collateral). Edit to add that on non eligible markets your theory is correct, for example: https://polymarket.com/event/will-jesus-christ-return-before-2027 https://polymarket.com/event/will-jesus-christ-return-before...

jebarker 9mo ago

I wonder how much of the activity on prediction markets these days is competing LLM scripts? I would guess the overlap in prediction market punters and AI boomers is high.

lowbatt 9mo ago
It'd be a good way to lose money at the moment. Probably not too far off in the future it would make sense though
- MarkusQ 9mo ago
  Would you like to bet on that? :)
- mormegil 9mo ago
  LLM-superforecaster parity projected to late 2026 (and LLMs now outperform non-expert public participants) according to https://forecastingresearch.substack.com/p/ai-llm-forecasting-model-forecastbench-benchmark https://forecastingresearch.substack.com/p/ai-llm-forecastin...

kwar13 9mo ago

This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability. In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. Slots are also unskilled games, prediction markets clearly some participants have a clear market edge, thus not efficiently priced.

deleted 9mo ago
[deleted]
kibwen 9mo ago
> In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit. And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a tacit admission that our markets aren't even remotely efficient, and that includes predictions markets. Efficient, rational markets are the exception, not the rule.
- Retric 9mo ago
  You misunderstood a basic principle here. In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.
  - kibwen 9mo ago
    If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question. If that sounds absurd, then yes, that's the point: our assumptions about what it takes in order to achieve an efficient market approaches the absurd. Which isn't to say that markets aren't often useful, especially compared to the alternatives, but rather that appeals to rationality don't survive contact with the enemy.

simonw 9mo ago

I'm getting some really skeezy ads for prediction markets on TikTok at the moment, the message is effectively "hey, are you broke? earn $50+/day on Kalshi!"

renewiltord 9mo ago
The Polymarket twitter accounts are massive ragebaiters. This is sports betting with some two minutes hate added in. I have to say I was this huge fan of the idea and I didn’t anticipate it would happen like this.
- LeifCarrotson 9mo ago
  I have occasionally tried checking Polymarket and Kalshi to get an idea of the general political/cultural/technological consensus on various issues that are difficult to research otherwise, eg. "what are the chances that the Senate changes hands in the 2026 midterms?" People have thought about it enough to wager a million dollars and the consensus is at about 1/3. I have this abstract prediction market in my head, each bet placed by some statistically average person with diverse experiences and exposures from my own bubble, who carefully considers their information and puts their two cents into the pot, and I assume that by adding all our ideas together we form some sort of combined intelligence which is more insightful and reliable together than any individual pundit could be. And then I go back to the home page, and see all the rabid sports fans, and realize that these bets are not being placed by deep thinkers.
  - anon84873628 9mo ago
    Election polling, analysis, and prediction is a mature industry with plenty of reliable commentators who can help answer your question. Here is just one example: https://www.cookpolitical.com/analysis/senate https://www.cookpolitical.com/analysis/senate Portrayal to the contrary is mostly due to non-experts pumping their own ego, or deliberate media spin.
  - asdff 9mo ago
    Polymarket is currently predicting a 3% chance of Christ returning by 2027 https://polymarket.com/event/will-jesus-christ-return-before-2027 https://polymarket.com/event/will-jesus-christ-return-before...

yieldcrv 9mo ago

To me this is all the more reason to get regulatory gatekeeping out of the financial markets If the odds in some financial products are worse than gambling while everyone can access gambling, then people should stop making a distinction under the guise of protecting investors it just drives investors to actual gambling because they cant get the exposure they were already looking for

JumpCrisscross 9mo ago
> it just drives investors to actual gambling because they cant get the exposure they were already looking for This argument gets trotted out by Wall Street every decade or so, usually under the guise of "democratising" some piece of finance. It's almost always bunk. Most investment capital is looking for safe returns. It's not competing with gambling. Even within the high-risk end of finance, the game is in turning that high risk into above-market but predictable returns through portfolio mechanics. (Fuckups aside, you can't generally portfolio mechanic your way out of the negative expectated value of a lottery ticket.) More simply: the notion that we need to increase risk and profitiabilty for intermediaries in investments to keep people from gamblig is a false economy. Gamblers are seeking a different thrill from what financial markets are designed to provide. To the degree we have a problem, it's in letting our markets look more like casinos. > exposure they were already looking for Broadly speaking, if you want exposure to the economy you're investing. If you want exposure to a number that goes up, you're gambling. This is an overly-simplistic delineation. But it works for first-order estimates.
- terminalshort 9mo ago
  The same financial products are used in both gambling and smart investing. The canonical example here being options. And the restrictions on what the public can and cannot invest in are complete bullshit. You can't buy shares in a series A startup because that is deemed to be too risky for anyone who is not an "accredited" investor ("accredited" here literally means rich). But anyone who wants to can bet on sports, go to a casino, or buy a 2x levered VIX ETF.
  - 9mo ago

Lucasjohntee 9mo ago

[dead]

bs7280 9mo ago

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game. The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.

sysguest 9mo ago
+1 if you're not the person-in-complete-power, your bet is really likely to be 'rigged' against you I'd rather play dice or buy lotteries
roflyear 9mo ago
well, at least for really odd ones - like the china example - the liquidity is (probably) going to be really low. you need people buying both sides to make money. But for big events/talked about stuff/etc ofc this is not true.
- bs7280 9mo ago
  Again - Its not the money I care about, its what people are willing to do to make it.
  - eru 9mo ago
    If there's not much money to be made (because of illiquidity and adverse selection keeping market participants out), then there's not much incentive for people to do weird things.
Buttons840 9mo ago
It's a national security issue too. Somebody poor grunt who chose to earn a living by laboring (which has proven to be much less effective than being born with money) will be putting fuel in the bombers and thinking "I could just make an anonymous bet..." It's a national security issue. We saw this with the Venezuela attack. A flurry of trading and someone made $400,000 for placing a bet mere hours before the "surprise" attack. https://www.pbs.org/newshour/nation/a-400000-payout-after-maduros-capture-put-prediction-markets-in-the-spotlight-heres-how-they-work https://www.pbs.org/newshour/nation/a-400000-payout-after-ma...

Lucasjohntee 9mo ago

[dead]

__MatrixMan__ 9mo ago

I hope we manage to leverage prediction markets to actually achieve goals rather than just making a casino out of it. For instance, if you spot malware in a commit you could bet heavily against it being merged, and that would attract the maintainers' attention, and they'll see what you see and not merge it, and you get paid for the code review--that money would come from whoever bet that it would get merged, which you could require be the author of the malware. I haven't worked it out entirely but it seems that there are opportunities to build games that reward dilligence and transparency and penalize deception and spam.

pawelduda 9mo ago
Why not just bet heavily against and then inform maintainers? By just betting on it instead it makes you look like you, or someone you know planted the malware
- __MatrixMan__ 9mo ago
  That is what I meant to say, that you'd inform the maintainers along with your bet against the commit. In this thought experiment I assumed that the maintainers are already being spammed by AI so heavily that the bet is necessary to get their attention. (Neal Stephenson had something similar going in in Anathem, he called them "bogons".) In the case where you're betting heavily in favor of a commit, maybe because you've reviewed it and think it's good, maybe because it contains malware you want to inject... you'd be attracting reviewer attention to that commit because if they can talk the maintainers out of it they end up with more of your money. Probably the best strategy for a malicious committer would be to sneak through a low value nothing-to-see-here commit, because the low bet would not attract extra reviewer attention, so the maintainers have to set it high enough that it still incentivizes review. I don't want to live in this world, by the way, I'm just afraid we might have to.
  - jamiepinheiro 8mo ago
    I was thinking of a similar idea to this, but for news/tweets/posts. As a consumer of media, I might decide to only read media with $x staked, so AI media factories need to be willing to stake that much to reach audiences, and will get penalized when they are wrong… I imagine a hard problem is building a system to resolve these markets.

jpmattia 9mo ago

Something that appears to be missing: Certain events attract "advertising" types of bets. E.g. There is value in making a candidate appear to be a leader, so dedicating dollars to swinging the market is more of a form of advertising than an intelligent bet. So it would be interesting to measure the inefficiencies of various bets vs the total market value in that bet. e: Although full disclosure, I did not pick apart the entire paper. Maybe it's buried in there.

jonbecker 9mo ago
super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption." i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.
- jpmattia 9mo ago
  > but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap) I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket. But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed? In any case: Thanks for a very interesting paper!
  - jonbecker 9mo ago
    If we weight by contracts purchased the gap is 1.02%, dollar weighted the gap is 1.00%. I'm glad you enjoyed the paper :)
    - jpmattia 9mo ago
      [I'm still thinking about this a day later!] I think an additional table/graph of how large-bet performance vs small-bet performance would be interesting in general, as well as broken out by market type. It kinda answers of the question: Are large bets equal to smart money? or are they equal in "smartness" to small bets?

Majromax 9mo ago

The analysis is interesting, but I think it ignores a few factors: 1. The article mentions the bid/ask spread for contracts, but I believe that Kalshi also has its own fee structure. Small edges (an expected loss of 0.57¢ on a 1¢ contract implies an expected gain of 0.43¢ on a 99¢ contract, or a 5.75ppt edge) can be easily eaten by even small fees, and liquidity provision is all about small edges. 2. The article ignores the time value of money, and contracts take time to resolve. If a contract won't resolve for six months and the risk-free rate is 5%, then buying a "sure thing" over 97.5¢ is a loss net of otherwise earnable interest. 3. Long shots offer greater implied leverage to bettors, making them more attractive. This is still (sometimes) an exploitable mispricing, but it's closer to the well-understood "bet against beta" factor. (Edit to add) Also, I think their explanation of the non-returns on finance is lacking: > Why is Finance efficient? The likely explanation is participant selection; financial questions attract traders who think in probabilities and expected values rather than fans betting on their favorite team or partisans betting on a preferred candidate. The questions themselves are dry ("Will the S&P close above 6000?"), which filters out emotional bettors. Financial contracts are the ones that are most perfectly hedges with existing markets. "Will the S&P close above X?" is a binary option, after all, so it's comparatively easy for a market-maker to almost perfectly offset their Kalshi positions with opposite positions in traditional markets.

postflopclarity 9mo ago
on point 1, an important thing to know is that these markets have a non-linear fee structure where the rate is higher near 0.5 and lower near tail prices
- Majromax 9mo ago
  True, but from the pdf it seems like the fee charged of market makers is 1.75¢ × P × (1-P) per contract. Near P=0 that's approximately 1.75% of the notional amount invested, but near P=1 that's approximately 1.75% of the potential gain. As I read it, the implication is that a market maker in the high-P regime needs to still have an expected edge of 1.75% to profit net of fees, which means that the 'maker return' table in this article is net negative after fees for all categories save for entertainment, media, and world events.

czhu12 9mo ago

I have no background in financial markets at all, but it strikes me that in markets like this, the "house" should be insiders right? The Maduro capture had an insider profit something like 400k. How would one go about understanding how that impact efficient markets? Could you use inefficient markets as a predictor of great volumes of insider trading?

danny_codes 9mo ago

I feel we need a term for these attempts to paint gambling as something other than gambling. Or just proper enforcement for gambling platforms like "prediction markets". Personally I find it disappointing to see so many people wasting their time on this stuff. I'm sure Coplan, for example, could be a productive member of society, but instead chooses to waste his time on stupid stuff like Polymarket.

fasterik 9mo ago
Prediction markets perform the valuable function of information aggregation, at least in theory. When there is a financial incentive to make a correct prediction, the market should converge on the probability an ideal observer would assign to the event. Of course in practice, there are issues like low trading volume, market manipulation, etc. And whether or not a particular market is performing better than, say, super-forecasters or experts in a given field is an empirical question. That said, it seems a bit excessive to dismiss prediction markets as merely gambling platforms that add no value to society.

codexon 9mo ago

Has anyone noticed a lot of polymarket posts on their X (formerly known as twitter) feed claiming to be making a fortune? It makes me feel like its some kind of coordinated guerilla marketing scheme.

YuukiRey 9mo ago

I’m surprised by the somewhat positive comments. I thought this was just a chance for insider trading without repercussions. If I work at $corp and know the hotly anticipated whatever is announced tomorrow, I can finally cash in on that knowledge. And the people losing their life savings on gambling now have one more tool. But what do I know. I’m probably oblivious to what greatness those Truth Engines will enable.

pwagland 9mo ago

An interesting article, however my question is technical. In the "The Mechanism of Extraction" section, how is that image made? It is nicely laid out, and has a nice "hand-drawn" feel. This is a good format for many technical drawings, but I have not found any tools that could create this.

frutiger 9mo ago
Excalidraw
LandR 9mo ago
Looks a bit like excalidraw. It's not, but it's pretty similar in look. https://excalidraw.com/ https://excalidraw.com/

misja111 9mo ago

I don't follow this part, can somebody maybe explain? > Yet on Kalshi, a CFTC-regulated prediction market, traders have wagered vast sums on longshot contracts with historical returns as low as 43 cents on the dollar. On prediction markets traders can bet both sides. E.g. on Polymarket I can currently bet that Greenland will be acquired by USA before 2027 and get 4:1 odds: or I can bet that this doesn't happen, and give 4:1 odds. If these odds are off, doesn't this mean that one side gets a bad return on investment, however the other side gets an equally good return? On balance the average return on investment by traders should just be 100 cents minus the margin of the prediction market, which tends to be only a few percent.

tim333 9mo ago
>On prediction markets traders can bet both sides In fact traders have to be there for both sides. The article means approximately that on 1c bets on unlikely things the people betting 1c to get a dollar if it happens do worse than those betting 99c to make a dollar if it doesn't happen. I'm not sure that means betting 99c to make a dollar is a great business though - your money is tied up, often the volume is low so if you can only bet say $99 to win $100 it may not be worth the hassle to make $1, and you are vulnerable to the bettors knowing something you don't - maybe the unlikely event isn't really that unlikely but you don't know.

WiSaGaN 9mo ago

A market maker needs a premium to provide liquidity. If all else is equal, why would they take on execution time risk? This is a universal feature of continuous-trading Central Limit Order Books (CLOBs), not something unique to prediction markets.

_def 9mo ago

> When the topic is dry and quantitative (Finance), the market is efficient. When the topic allows for tribalism and hope (Sports, Entertainment), the market transforms into a mechanism for transferring wealth from the optimistic to the calculated. I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism,

buellerbueller 9mo ago
>I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism where is your paper?
- pinkmuffinere 9mo ago
  Irrational Exuberance by Robert Shiller
  - buellerbueller 9mo ago
    I'll allow it!

infinitewars 8mo ago

It should be obvious why Peter Thiel started Polymarket and also Palantir.