Essay:
Gaming the SystemOn the stratospheric rise of prediction betting.
( 1 ) Jesse Jackson was a civil rights activist and two-time Democratic presidential candidate. He finished second in the 1988 primary to Michael Dukakis, who later lost the presidential election to George H. W. Bush.
( 2 ) There is a long history of attempts to predict the Second Coming. In 1844, the followers of Baptist preacher William Miller gave away their possessions and awaited Christ’s return. The day in question—October 22—has come to be known as the Great Disappointment.
( 3 ) Papabili—literally “pope-ables”—are cardinals considered likely candidates for election. There is a well-known saying in the Catholic Church: “He who enters the conclave as pope leaves it as a cardinal.”
In 1988, three economists were having a beer in Iowa City and grousing to each other about the unreliability of election polling. Jesse Jackson had just scored a landslide victory in the Michigan Democratic caucuses, an outcome polls and pundits had utterly failed to predict.1 The three economists wanted a better mechanism, and they had an idea: What if markets could predict voter behavior better than polls? If, as the economic theory went, the price of a stock reflects all existing information about its value, couldn’t a betting market do the same for elections? Polling can miss and analysts have their biases, but a market might compel participants to set aside their preferences in favor of what they really knew.
The result was the Iowa Electronic Markets, an early digital exchange that allowed users to place small wagers on election outcomes. It was a success. From 1988 through 2004, the IEM outperformed traditional polls roughly three-quarters of the time. By the early 2000s, the idea had been widely co-opted: Many large corporations set up in-house exchanges to surface collective wisdom, finding that employees were more honest about deadline feasibility when betting cash anonymously than when reporting to a VP. Wall Street firms began offering financial products that would pay off if an investor could accurately predict macroeconomic reports on hiring, inflation or retail sales. Around the same time, Defense Advanced Research Projects Agency (DARPA), the Pentagon’s research wing, began developing a market that would let CIA analysts, academics and vetted outsiders bet on geopolitical contingencies such as coups and conflict. Two senators caught wind of the plan and condemned it as a “federal betting parlor on atrocities and terrorism,” leading to the program’s cancellation. Umbrage won the day then, but it didn’t last.
Since the 2024 election, prediction markets—exchanges that allow investors to buy contracts on the outcome of a future event—have ballooned to vast proportions, and have embraced every imaginable contingency. Industry leaders Polymarket and Kalshi now process tens of billions of dollars in bets from hundreds of thousands of users every month, propelling themselves to a joint valuation of more than $30 billion. Anyone with a smartphone (and in some locations a VPN) can bet on virtually any outcome, including but not limited to the exact chart position of a Justin Bieber single, the daily high temperature in Paris, the arrival on Earth of aliens or a messiah, Eurovision, an invasion of Taiwan, Taylor Swift’s choice of bridesmaid, and whether Donald Trump will utter the exact word “discombobulator” in the coming week.2
( 1 ) Jesse Jackson was a civil rights activist and two-time Democratic presidential candidate. He finished second in the 1988 primary to Michael Dukakis, who later lost the presidential election to George H. W. Bush.
( 2 ) There is a long history of attempts to predict the Second Coming. In 1844, the followers of Baptist preacher William Miller gave away their possessions and awaited Christ’s return. The day in question—October 22—has come to be known as the Great Disappointment.
( 3 ) Papabili—literally “pope-ables”—are cardinals considered likely candidates for election. There is a well-known saying in the Catholic Church: “He who enters the conclave as pope leaves it as a cardinal.”
