Special interests are moving into prediction markets, and it’s a problem

Consider a pension fund with significant exposure to energy infrastructure assets whose value swings sharply depending on which party controls the White House. The fund’s treasurer isn’t making a political prediction; he is managing a correlated risk. So, through a broker, the fund takes a substantial position in a political event contract on the less favorable candidate winning. If the election goes the wrong way, the payout offsets the anticipated loss.  

The position is perfectly rational. It is also, to anyone reading the market, indistinguishable from a genuine forecast.

Prediction markets are, at their best, genuine public infrastructure. This is why the hedge by the risk manager in that example is also quietly poisoning one of the more genuinely interesting innovations in political forecasting. A probability and an insurance premium are not the same thing. In prediction markets, they will become increasingly indistinguishable. 

We are not describing a distant hypothetical.

“We’re seeing it in contracts related to economic indicators, like GDP growth rate, whether interest rates are going up or down,” former Commodity Futures Trading Commission lawyer Jake Preiserowicz told Wired. The infrastructure is already expanding: this month, Kalshi announced a new commodities hub designed to “make it simple for anyone to hedge or speculate on the direction of the world’s most important commodities.” Using political contracts the same way is the logical next step. 

New York Stock Exchange President Lynn Martin said it plainly at a forum in February. She pointed in particular to Election Night 2024, when Polymarket showed President Trump winning before any other source did. On election eve, although polling averages showed a dead heat, Polymarket had Trump at 57 percent. “The markets tend to be the single best piece of information available out there,” Harry Crane, a professor of statistics at Rutgers, told Fortune. That is the wisdom of crowds that platforms like Kalshi and Polymarket have promised........

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