From Columbia Law School's CLS Blue Sky Blog, May 7:
In a new article, we investigate how prediction markets—digital platforms designed originally for distilling dispersed knowledge into accurate forecasts—are steadily morphing into what look and feel like online gambling venues. That shift creates a regulatory puzzle, with consequences for market efficiency, consumer welfare, and financial oversight.
From Collective Intelligence to Gamified Speculation
For the last couple of decades, prediction markets have been touted as the gold standard for crowd-sourced forecasting, outperforming traditional polls and expert panels on everything from presidential elections to influenza prevalence. They offer near-frictionless trading, real-time price signals and a straightforward mechanism for aggregating scattered information—attributes that multinational firms, central banks, and public-sector agencies have harnessed for scenario planning and risk management. At their best, these platforms illustrate how financial innovation can democratize participation, sharpen price discovery, and channel previously untapped expertise into socially useful insight.
Recent product iterations, however, complicate that narrative. Our mixed-methods study—combining interface audits, transaction-level data, and user-experience examinations across five leading platforms—shows that many operators have imported design elements from video games, sports-betting apps, and crypto betting sites. Users are greeted with animations, “cha ching” visuals, or boosts when trades settle in the money; persistent leaderboards tease near misses; and “hot streak” badges frame consecutive winning trades as status symbols worth chasing. Some sites even extend virtual credit against paper gains, encouraging a debt-fueled spiral that mirrors the “house money” effect observed in slot-machine research. These nudges subtly migrate the experience from deliberative forecasting toward rapid-fire wagering—a shift with material consequences for financial risk and user autonomy.
Behavioral and Public-Health Impacts
Drawing on addiction science, behavioral psychology, and self-determination theory (SDT), we highlight how design tweaks exploit universal cognitive biases and basic psychological needs—competence, autonomy, and relatedness—to keep users engaged. SDT predicts that when these needs are externally manipulated rather than intrinsically satisfied, individuals become especially vulnerable to compulsive behavior. Accordingly, younger, financially less-secure users would be especially prone to “whiplash” account swings—rapid cycles of large gains followed by equally steep losses. The combination of limited financial buffers and high sensation-seeking makes this cohort particularly sensitive to the competence- and novelty-related nudges embedded in platform design.
Moreover, dual-currency architectures—such as the platforms’ virtual/fantasy money, which sit alongside real-money trading—condition users to take progressively bigger risks by masking the true cost of each wager. For instance, converting $1 into 100 (or 10,000) fantasy tokens inflates purchasing power on screen, dulls price salience, and mimics the psychological pathways documented in the loot-box and simulated-gambling literature, where early play-money experiences increase the likelihood of later real-money spending....
....MUCH MORE
