Place Your Bets—on Everything: Babson Professors Unpack the Prediction Markets 

Care to make a wager? These days, it’s easier than ever.

Watch a game, and ads for online betting sites are a ubiquitous part of the broadcast. To lay their money down, gamblers need only a phone and a credit card.

But betting isn’t just confined to the world of sports anymore. Thanks to the rising popularity of prediction markets such as Kalshi and Polymarket, users can place bets on a dizzying array of outcomes, from politics to weather to the music charts to the stock market. They can bet on election results, award shows, the launching of military actions, and even if the government will acknowledge the existence of aliens.

“The rise of prediction markets over such a short period of time has been remarkable,” says Linghang Zeng, associate professor of finance at Babson.

That rise brings opportunity. Though many of these wagers may be trivial in nature, prediction markets produce a tremendous amount of data, and that data has insights to offer. Taken together, all those bets represent the wisdom of the crowd, providing information that could be harnessed by leaders to make more informed decisions.

“While some critics equate prediction markets with casinos,” Zeng says, “the evidence suggests they can effectively aggregate dispersed information, the wisdom of crowds, to forecast real-world events.”

Tapping into that wisdom, though, comes with risk. After all, prediction markets may offer collective insights, but they’re still a form of gambling that involves real money and real stakes. Unpacking the promise and peril of prediction markets, Babson finance professors consider how this wave of betting can benefit society, and also hurt it.

Real-Time Forecasting Tools

While the use of prediction markets has exploded recently, those markets are not a new idea, says Steven Feinstein, associate professor of finance. Back in 1988, for instance, University of Iowa professors launched a betting marketplace, the Iowa Electronic Markets, in response to the inaccuracy of political polling. Could that marketplace, they wondered, be more accurate?

“There is a lot of academic research into these markets that go back years,” Feinstein says. “I think most economists, knowing the research, believe it’s a good thing these markets have emerged.”

That’s because the data these markets provide is so vast. Whatever issue might be vexing society, the prediction markets are probably taking bets on it. “It gives you good information about events that are important to society, such as global warming, catastrophes, election outcomes, political events, and budget deficits,” Feinstein says.

Professor Jerome Taillard, the Joseph M. Spinelli ’98 Term Chair in Finance, points to recent research by economists at the Federal Reserve Bank of New York. Their work suggests that prediction markets have at times outperformed traditional futures markets in forecasting policy outcomes. “These markets can function as real-time forecasting tools,” Taillard says.

“It gives you good information about events that are important to society, such as global warming, catastrophes, election outcomes, political events, and budget deficits.”
Steven Feinstein, associate professor of finance

Taillard and Zeng recently teamed up to publish their own prediction market research. Their work looked at a period last year when President Donald Trump was threatening to dismiss Jerome Powell, chair of the Federal Reserve. The professors watched how changes in the prediction markets speculating on Powell’s potential departure were strongly correlated with movements in stock and bond markets.

“This evidence suggests that prediction market prices are not merely noise,” Zeng says, “but instead contain economically meaningful information that is rapidly incorporated into broader financial markets.”

Beyond their value as a forecasting tool, prediction markets can be used for risk management. For example, say a firm is exposed to the uncertainty that tariff policy is creating. To offset its losses, the firm could use the markets to place bets on the tariff policies staying in place. “(These markets) allow firms and investors to hedge previously untradeable risks,” Taillard says.

A Societal Question

For all their potential benefits, prediction markets carry risks. A chief one is that it’s a form of gambling, and just like online sports betting sites, these markets are easy to access and use. Maybe a little too easy. “Gambling is a problem,” Feinstein says. “Some people are compulsive gamblers. They will cause pain and harm to themselves and others.”

Regulations might not help. “If prediction markets expand rapidly under lighter federal oversight, consumer protections may not keep pace,” Taillard says.

The lack of regulations can cause other problems as well. “One concern I have with these markets is the regulatory gray area they occupy, especially when real money is involved, which could lead to issues around market manipulation,” says Patrick Gregory, managing director of Babson’s Stephen D. Cutler Center for Investments and Finance and a professor of practice in finance.

“In some cases, prediction markets could potentially influence the very outcomes they are meant to forecast, which creates additional ethical and regulatory challenges.”
Linghang Zeng, associate professor of finance

Bettors may use insider information on the outcomes they’re betting on, or worse. “In some cases, prediction markets could potentially influence the very outcomes they are meant to forecast, which creates additional ethical and regulatory challenges,” Zeng says.

The very nature of what is being bet upon can raise serious ethical concerns. In the wake of the killing of Iran’s Ayatollah Ali Khamenei, for instance, Kalshi froze $54 million in bets placed on him being ousted as supreme leader. Transactions “directly tied to death,” the site said, aren’t allowed.

Such a troublesome bet makes one wonder: What is the effect of turning so many serious issues of society, of matters of life and death, into a wager? Do these markets risk transforming societal concerns, no matter how important, into some kind of game?

“Prediction markets raise a societal question,” Taillard says. “Do they improve collective forecasting and decision making, or do they instead encourage the gamification of investing and the financialization of policy and social outcomes?”