The walls have started closing in on prediction markets.
On Thursday, the Department of Justice announced it was charging a U.S. Army soldier who helped plan the operation to capture Nicolas Maduro with five felonies, alleging he used classified intelligence to bet $33,000 on Polymarket that the raid would happen, then cashed out roughly $400,000 when it did.
The day before, Kalshi fined and suspended three federal candidates who engaged in insider trading on its platform by betting on their own races. Under mounting pressure, Kalshi and Polymarket have rolled out new restrictions barring politicians from trading on their own campaigns, athletes from trading in their own leagues, and employees from trading on contracts tied to their employers.
But Robin Hanson, who’s been making the intellectual case for prediction markets for nearly 40 years, says this is all wrong.
“You want them trading,” Hanson, a professor at George Mason University who helped develop the market scoring rule used by many prediction markets, said of insiders. “You want the most accurate prices. That’s pretty clear. The purpose of the market is to inform decisions.”
For a swath of consumers, particularly younger and male, prediction markets are an attractive arbitrage opportunity. For many policymakers, they’re a troubling scourge, literally equivalent to “gambling.” Even President Donald Trump said that he was “never very much in favor” of them, despite his son’s business ties to the platforms.
But for those market-loving economists, prediction markets are a way to pay people to tell the truth as fast as possible. For some events, that’s marginal; basically everybody knew about Lady Gaga being this year’s surprise Super Bowl guest a day before it happened, thanks to the markets.
But more consequential information has been revealed too. In the final hours of the Biden administration, an anonymous Polymarket trader netted roughly $300,000 betting correctly on four specific pardons the outgoing president would issue before leaving office.
Like all economic models, this one depends on an assumption: that insiders will trade. Someone who knows the outcome buys a “yes” contract and pumps the price toward the truth. Without that step, the market isn’t any faster or better than news outlets or polling at providing information.
That doesn’t mean Hanson gives every politician and soldier a free pass. He knows there are “tradeoffs in society.”
“There’s organizations that want to keep secrets, and then there’s a larger world that often wants to know those secrets,” Hanson said. “And I don’t think we should go to either extreme on the spectrum.”
A soldier making a $400,000 bet on a mission happening before the mission begins—a move that drew eyeballs even before Van Dyke was arrested—is clearly an “operational risk,” according to Sen. Elissa Slotkin (D-Mich.), a co-sponsor of legislation to bar government employees from trading on prediction markets.
Hanson doesn’t dispute that. But he also asks critics to consider Wall Street.
“Many people are going to say prediction markets are exploiting people,” he said. “But that’s what ordinary financial markets do in exactly the same way.”
Hanson thinks insider trading is “rampant” in traditional financial markets. When a company makes a major announcement, he notes, half the move happens before the news is public, and half of that is due to insider trading, with the rest driven by traders who spot it and pile in. The SEC prosecutes only a sliver of those trades.
It wasn’t always illegal, he pointed out. That changed a century ago, but the SEC’s original rule applied narrowly to officials of a firm trading on their own company’s information.
Then roughly 15 years ago, he said, the Commodity Futures Trading Commission extended the rule to “everybody who had promised to keep a secret,” he added.
The expansion, in Hanson’s telling, is what transformed the concept of insider trading from a narrow corporate-governance rule into a broad obligation on everyone to help keep secrets. And that, he argued, is too far.
“I’d rather there was more an intermediate tradeoff,” he said. “Organizations — it’s fine to have [them] use contracts to try to keep their secrets, but it’s fine for journalists, say, to try to find things out they don’t want them to know.”
And since society already accepts journalism’s role in divulging secrets, he doesn’t see a principled reason to impose a different standard for prediction markets.
His suggested test: any legislation that would bar government employees from trading on prediction markets should, by the same logic, bar them from talking to reporters.
“It’s the idea that certain elites should be in charge of key information aggregation, and ordinary people in these markets should just not be there,” Hanson said. “That’s sort of an elitist attitude that I just have to reject.”
But even if prediction markets deserve the same latitude journalism gets, it begs the question of what happens to the people on the losing end of markets built to reward insiders.
To that, Hanson offers advice he gives when teaching finance to his economics students.
“When you sit down at a poker table, you’re supposed to look around and find the fool,” he said. “If you don’t see the fool at the table, you should get up and go, because it’s you.”
In his view, individuals should recognize their odds and get out. But if they don’t, he doesn’t see that as more of a scandal than an artist starving to pursue their dreams, or one of his friends going into debt because he bought too many jet skis. The modern age allows for a lot of risk-taking, including letting young people choose whom to date, Hanson pointed out.
The question isn’t whether prediction markets are risky. It’s whether they produce something beyond the risk. And for Hanson, that answer is obvious.
“It’s a great democratic institution that everybody’s allowed to participate,” he said. “But that doesn’t mean everybody is recommended to participate.”
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