PREDICTION MARKETS
One bite and I was gone with the wind But what of the harm? This is a second hard truth: these markets lead many to ruin. There is a squishy dark spot deep in the recesses of the human mind that triggers reinforcing dopamine in response to uncertainty. That is science. 14 You might have experienced it if you’ve ever felt yourself glued to your phone waiting to hear from a school, job offer or lover — or played golf. Some people exposed to uncertainty react compulsively and destroy themselves. Even more broadly, there is a gradient of sophistication and knowledge in human populations, and, where we are allowed to gather and wager against each other freely, the strong end up extracting money from the weak. This isn’t fair and it isn’t good, but it is the fundamental dynamic of sports betting, day trading, and it will be of prediction markets too. These qualities, combined with a tendency to attract cheats and gambling’s natural association with dissipation and waste, have historically made the practice unseemly, so interlopers have often tried to marginalize and ban it. But this doesn’t work. Markets are not constructed, they are inherent. Bans on betting only create unregulated black and gray markets. This is probably part of the reason that gambling laws have liberalized in the United States in recent years — people recognize that prohibition can cause more harm than good. After all, the problem gambler may lose his house in either a regulated or unregulated betting market. But at least in the regulated market he will keep his teeth. A clear-eyed perspective takes both the downsides and benefits of these markets together. If this is “gambling,” then that is no invective. Weighing these benefits, we can construct a rough harm reduction hierarchy. Prohibition is the worst option, maximizing harm. But state regulated markets likely still cause more harm than do federally regulated prediction markets. That is because of incentives.
State regimes have mostly flowed from pre-existing casino regulation, typically favoring the house. That is why sports books are permitted to limit bet sizes of any “sharp” bettor while giving their losers exorbitant perks to keep betting. 15 This practice maximizes the damaging aspects of these markets, while simultaneously removing the most sophisticated participants, thereby kneecapping price discovery. Extractive behavior flows naturally from sports books’ posture as their customers’ counterparty. They can only make money as long as they are taking it from users. Prediction markets do not have this problem. They are simple intermediaries where bids and asks can meet, and from that process, a signal may emerge. This is the point Mr. Mansour tried to make in his Axios interview, but if you can’t first admit that these products are close substitutes, then the principled arguments melt into noise. Prediction markets are like gambling, just better. It is simply an artifact of history that state-regulated sports books came first, so have an incumbency advantage. Conclusion The CFTC has expressed reservation in the past over the idea of directly regulating new markets. Its capacity will have to increase to do so effectively. This is reasonable, but in accepting the status quo and abdicating the regulation of risk assets to the states, it would be materially harming American consumers. NCAA v. Murphy made progress, but we should not stop there. Prediction markets’ ascendance is an inflection point in the regulation of risk assets. The CFTC will have an opportunity to choose, or at least influence, whether popular betting markets remain regulated by the states or come under the federal umbrella. In making that choice, the natural question is which structure will maximize the benefits, hedging and price discovery, while minimizing the harms, predation and compulsive behavior.
This doesn’t necessarily mean that the CFTC should move to
14 Mike J.F. Robinson & Patrick Anselme, How Uncertainty Sensitizes Dopamine Neurons and Invigorates Amphetamine-Related Behaviors , 44 Neuropsychopharmacology 237 (2019), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6300523/. 15 Katherine Sayre, Sports Betting Companies Weed Out Winners. Gamblers Want to Know Why , Wall St. J. (July 14, 2024), https://www.wsj. com/business/media/sports-betting-companies-limit-winners-f06ea822.
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IMGL MAGAZINE | JUNE 2025
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