How Predictions Markets Work
I have previously blogged about how predictions markets work and some of the ethical issues that should be addressed. In this blog, I examine the benefits and harms of betting on predictions markets and regulatory concerns. I also look at the ethical issues using a Virtue Ethics perspective.
Prediction markets offer a way to leverage collective guesses about the likelihood of real-world events. The companies operating these platforms claim that prediction markets are forms of iinvestment and offer financial hedging. Opponents and critics—including state gambling regulators and attorneys general—argue that prediction markets offer a product that is fundamentally indistinguishable from gambling and should be regulated accordingly.
Prediction markets are booming in popularity and facing scrutiny amid reports of market manipulation and insider trading. In the U.S., most betting, be it on prediction markets or on sports apps, is on the outcomes of sporting events. Indeed, betting on sports accounts for between 85% and 90% of the total betting volume on U.S. prediction markets. The total trading volume on Kalshi, one of the major prediction market platforms, for the first eight months of 2026 was $180 billion compared to $28 billion for all of 2025.
Prediction markets are open exchanges online where people wager on future events, from election dates to economic outcomes, to world events, to minor occurrences. Participants can bet on anything from the price of an asset to how many times a public figure will tweet in a day, to the start or end of a war. Each bet shifts the market odds, which in turn reflect what participants collectively believe is most likely to happen.
Each Polymarket is a yes/no question, like “Will Putin meet with Zelenskyy by September 30, 2026?”. You buy shares in “yes” or “no” outcomes. Prices reflect crowd-sourced odds and probabilities. For example, if yes is at 30 cents, that’s a 30% chance. Markets resolve based on official results. For multi-outcome events, like “Nobel Peace Prize Winner 2026,” you simply trade on the specific outcome you think will win.
Virtue Ethics
Recently, there have been any number of stories about prediction markets that address the ease of using it, dangers of using it, and whether markets themselves are ethical. One way to make that determination is by applying virtues to the behavior.
Virtue Ethics refers to a trait of moral excellence or goodness. It encompasses behaviors and attitudes that reflect high moral standards, such as honesty, integrity, and kindness. Virtues are often seen as essential qualities that contribute to an individual’s character and are valued in various ethical frameworks as foundational principles of a good life. The problem with betting on prediction markets is it challenges virtuous behavior. It compromises the end goal of virtue, which is human flourishing or happiness.
How is all of this affecting young people, especially young men, who are the most impacted by the surge in sports betting? Some have become addicted to the activity and are being harmed by turning away from their studies, losing social connectedness, and losing money, in some cases a lot of money. Others participate occasionally, as entertainment or out of a need to feel part of social group.
It’s important that we do not dismiss the human element when analyzing whether betting on prediction markets is ethical. An Aristotelian virtue that is relevant here is self-control. Self-control is a fundamental virtue that involves mastering one’s desires and impulses. It is often associated with temperance and is considered essential for personal discipline and moral integrity.
An example of losing control is John Pederson, who could not work because of a car crash. He was in need of money so he took out a variable-interest loan and started betting. At first, it worked. Pedersen turned about $2,000 into $8,000 by betting on daily snowfall totals in Detroit, where he lives. He turned that into $41,000 by trading on sports, using a strategy he developed with the help of AI, according to a Wall Street Journal review of his account records. Then he placed an audacious bet: All $41,000 that a celebrity would say a particular word on TV. He lost
Arguments for Allowing Predictions Markets (Benefits)
Utilitarianism is a method of ethical reasoning that evaluates the benefits and harms of an action and selecting the action that maximizes the et benefits to stakeholders. Supporters argue that prediction markets are not necessarily about gambling, but rather about information discovery. A variety of outcomes are discussed here.
- Prediction markets can aggregate information more efficiently than polls or experts.
Prediction markets force participants to put money behind their convictions, which essentially rewards accuracy with financial incentives. Supporters argue this makes them more effective than polls or expert commentary at forecasting future events because markets continuously absorb new information and update probabilities in real time. - Financial markets already operate as forms of event contracts.
If you’ve ever invested in single stocks, you’ve essentially participated in prediction markets. The only difference is that, with stocks, investors are limited to predicting the outcome of a company instead of an event. Bonds and derivatives are also a type of prediction as well, as bonds essentially price default risk and derivatives price probabilities. This raises the question, why is betting on election outcomes different from betting on interest-rate moves. - Prediction markets could improve forecasting.
Because they are a useful tool for crowdsourcing information, prediction markets can be used by businesses or governments to improve decision-making. Users are more likely to make predictions on events about which they are knowledgeable, and this information could be helpful for forecasting recessions, fraud, supply chains, elections, and demand. Because they can source this information quickly, prediction markets can surface truths faster than committees or social media.
Arguments Against Predictions Markets (Potential Harms)
Opponents argue that event contracts cause unwanted externalities.
- They may incentivize harmful or unethical behavior.
Oftentimes, event contracts offer events surrounding wars, assassinations, elections, and disasters. These are uncomfortable things to bet on, as it may feel as if users are rooting for these outcomes. Additionally, this raises ethics concerns over investors profiting from others’ tragedies. - Markets can be manipulated.
Even though prediction market outcomes may appear more organic than the performance of publicly traded companies, they are not immune to manipulation. Deep-pocketed participants willing to absorb larger losses may attempt to distort market odds, while coordinated misinformation campaigns and bot-driven activity can artificially influence sentiment and pricing. As event contracts become more popular, concerns are growing that the markets themselves could shape public perception rather than simply reflect it. - They lack consumer protections and regulatory frameworks.
Across the globe, prediction markets are relatively new and therefore lack regulation, as they don’t fit cleanly into existing categories. It is unclear if they are considered securities, gambling, or derivatives and therefore lack proper regulatory oversight and consumer protection standards.
There are many examples of using insider information to make bets on prediction markets, clearly one prospective harm. Here is one that involved Google.
| What the Bet Was | Why People Traded It | Key Insight & Outcome |
| Markets on the release date of Gemini 3 and specific, non-public Google search trends. | Suspected internal corporate knowledge was being traded by a high-accuracy account. | Outcome: A trader, later suspected to be a Google employee, profited over $1,000,000 in a single day. Lesson: Prediction markets can act as a real-time corporate intelligence leak, revealing internal sentiment or even non-public information before official announcements. This raises ethical and legal questions about profiting from insider trading. |
Regulating the Markets
The key to controlling these markets is through regulation, but that has been slow in coming. The Commodity Futures Trading Commission (CFTC) should set guardrails to regulate bets on prediction markets.
- Require prediction markets to monitor on-platform activity and the resolution sources their contracts depend on.
- Federal authorities should develop investigative protocols for manipulation campaigns linked to market positions.
- Congress should clarify how existing fraud and market-manipulation statutes apply to conduct designed to move prediction-market prices.
It may be time to create a new regulatory agency that adopts rules, oversees activity, and investigates abuses in all forms of betting, including sports betting and betting on prediction markets. As occurs in many situations, the rules have failed to keep up with the expansion of activity on prediction markets.
Insider information can create opportunities for profit in prediction markets, raising questions about the ethics and legality of such practices. Insider trading has long been regarded as a market distortion that should be prevented to ensure fairness and integrity in the financial markets.
As prediction markets continue to grow in popularity, regulators will increasingly need to decide whether these platforms belong within financial services, gambling, or an entirely new category.
Blog posted by Steven Mintz, PhD, professor emeritus from Cal Poly San Luis Obispo, on September 8, 2026. You can communicate with Steve at: smintz@calpoly.edu. Visit his website to find out more about his activities.