"Are Prediction Markets Good for Anything?"

From Asterisk Magazine, Issue 14:

We all know they’re casinos. It’s time to look at the data behind the froth.

In 2007, Nobel laureates Kenneth Arrow, Daniel Kahneman, and other notable scholars published a statement arguing that prediction markets could “substantially improve public and private decision-making.” The theoretical foundations were deep. 

Friedrich Hayek had argued in 1945 that markets aggregate dispersed, local, and tacit knowledge through the price system better than any central planner. In 2000, George Mason University economist Robin Hanson proposed a system he called futarchy, in which markets would be used to evaluate whether policies deliver on promises. Seventeen years later, Philip Tetlock, Barbara Mellers, and Peter Scoblic were championing forecasting tournaments as a way to generate useful policy knowledge for the intelligence community and to depolarize political debates. 

Institutions including Google, Microsoft, the CIA, the wider U.S. intelligence community, and British government intelligence analysts have all experimented with internal prediction markets. Some of these trials were more successful than others, but all were small. And we know, from both theory and practice, that more bettors make markets more accurate. Hal Varian, Google’s chief economist, likes to call prediction markets “information markets,” and the bettors the “suppliers” of the information. 

For decades, prediction market optimists — and I count myself among them — have argued that once we build better markets and increase the supply of bettors, accuracy will improve, and we’ll all be able to benefit from a new level of societal foresight.

Now, in 2026, public prediction markets like Polymarket and Kalshi transact billions of dollars in volume each month. The vast majority of these bets are not on questions that might produce useful information. Roughly 90% of Kalshi’s trading volume (dollars exchanging hands between bettors) is from sports betting, making Kalshi effectively a sports gambling website with a small prediction market attached. I find that over 80% of the trading volume on Polymarket is concentrated on sports, cryptocurrency prices, or election betting.¹

Much ink has been spilled on the negatives — such as gambling addiction and insider trading — of the growing popularity of these markets. But what of their promise? Are they producing valuable information and making humanity wiser?

Caravaggio, The Cardsharps, 1594.

Demand, demand, demand 
To understand how useful this supply of forecasts is, and whether the forecasts really are delivering on the vision of the progenitors of prediction markets, we need to think about another factor: demand. 

It is entirely conceivable that prediction markets are only being used by bettors themselves. But if individuals, firms, media, and policymakers want (or need) the predictions we see on these markets, this evidence of demand can be used as a proxy for their usefulness. Vitalik Buterin, creator of the cryptocurrency Ethereum, summarized in Info Finance this dual nature of prediction markets: “If you are a bettor, then you can deposit to Polymarket, and for you it's a betting site. If you are not a bettor, then you can read the charts, and for you it's a news site.” 

I’ve thought hard about how to sell prediction markets to consumers. In 2020, I created Google’s current internal prediction market. Since then, I’ve served as the CTO of Metaculus, a non-market-based crowd-forecasting website, and now run FutureSearch, a startup that provides AI forecasters and researchers. In my work, I’ve found that the benefits of prediction markets fall into five different categories. 

First, markets can provide risk monitoring. I learned about COVID-19 in February 2020 from Metaculus, causing me to cancel a planned trip that would have left me stranded. 

Second, they can help with interpreting news, showing whether, and how much, a current event might affect larger outcomes. For example, the closure of the Strait of Hormuz during the 2026 Iran war led to an increase (from ~25% to ~35%) in the forecasted chance of a 2026 US recession due to the spike in oil prices.

Third, they can inform planning around policy outcomes, such as whether TikTok will be banned in the US.²

Fourth, they could create accountability for claims made by political or business leaders. For example, in June 2025, when President Trump said he was contemplating a strike on Iran’s nuclear program, many Middle East experts dismissed the prospect, according to an article from the Council on Foreign Relations. Yet, per CFR, prediction markets gave a 58% chance of strikes that week, and we later learned that seven B-2 stealth bombers were then on-route.

Fifth, they could produce novel information, allowing traders to discover or track things others don’t, such as when major AI milestones will be reached.³

Now let’s see whether the billions wagered on markets each month are supplying these five forms of useful information....

....MUCH MORE