The world's gone mad indeed

The morality of making money off of *gestures wildly at everything*

I was invited back on PBS NewsHour to discuss the latest scandal in the world of prediction markets. U.S. Special Forces soldier Gannon Ken Van Dyke was arrested after allegedly using classified information about a covert U.S. raid that captured Venezuelan leader Nicolás Maduro to place bets on the prediction market Polymarket, turning roughly $33,000 into more than $400,000. Prosecutors say he exploited insider knowledge of the operation’s timing and outcome, then tried to cover his tracks through cryptocurrency transfers and account changes. The case has intensified scrutiny of whether these markets can be abused by people with privileged government information, or really any inside information about anything at all.

I felt like I kind of fumbled the interview. I was prepared to talk about a number of things I thought were interesting and important about this case.

• I wanted to talk about how Van Dyke tried to open an account on Kalshi (which, unlike Polymarket, is fully located within and regulated by the United States) and he was blocked.

• I wanted to talk about how geopolitical prediction markets are a massive liability for these companies since they are attracting so much negative attention despite being a tiny fraction of their business, which is over 90% sports betting.

• I wanted to say that insider trading on prediction markets might be a feature rather than a bug, and that if the utility of these markets is that they can accurately predict future events, insider information almost guarantees their effectiveness.

• I also wanted to say that betting on the outcomes of wars and other calamities is nothing new. We’ve all heard about members of Congress loading up on defense-related stocks and making a killing (no pun intended). And we’ve all seen Eddie Murphy get rich betting on the weather in the final scene in Trading Places.

The point is, I feel like there’s a lot of interesting things to discuss about the proliferation of prediction markets in the United States, but I’m not sure we are focusing on the right things.

One of the questions I was asked last week was “Is there something immoral about betting on geopolitical events.” I was caught off-guard by this question (I shouldn’t have been. This is actually the second time PBS NewsHour asked me that question, and I didn’t do any better answering it the first time.). I said something about how people made a billion dollars on oil futures in the minutes before the announcement of the cease-fire in Iran. I feel like I could have done better with than answer if not for freezing up like a deer in headlights. Because I do think there’s a crucial point to be made here.

Part of what tripped me up is that I don’t understand why anyone would want to know my opinion on what is moral or immoral. I certainly have strong feelings about morality and how we should conduct ourselves in society, but I’m not sure that’s the right question for us to be asking about this situation. If that’s really what you want to interrogate - the morality of financially profiting off of geopolitical events like war and famine and terrorism and the likes - then you should tread carefully.

Recently a lot of questions have been raised about suspicious activity in the futures markets, particularly oil futures, where literally billions of dollars have changed hands in the minutes before Trump’s announcements about the situation in Iran. The amount of money people are making trading oil futures on potentially inside information about the war in the Middle East is multiple orders of magnitude higher than what this one soldier made betting on Polymarket about Maduro. That doesn’t justify what he did - far from it. The point is that if we all agree what he did was criminally and morally wrong, then what are we going to do about the people making billions of dollars doing the same thing on an institutional scale?

But pools of dark money in the futures markets are hardly the only ones profiting off of geopolitical events. We’ve been debating the ethics of members of Congress trading stocks despite being privy to non-public information for decades now. Over a half a billion dollars a year is traded in their portfolios, and several dozen members have violated disclosure laws (the penalty for that, by the way, is a $200 fine). The very people who determine which private companies should get billions of dollars worth of defense contracts also happen to hold stock in those same companies. If what Van Dyke did was immoral and criminal, how is this ok?

And what about the rest of us? Don’t we all benefit financially from a strong stock market? Aren’t all of our 401ks and pension funds managed by stock-pickers and investment bankers who use predictive models or even inside information to move our portfolios into oil futures during an oil crisis or Palantir or Ratheon during a war? Is this immoral? Don’t we all profit off of suffering to some degree?

The point I’m trying to make isn’t that we all do it so it’s all ok. It’s just that I find myself a little confused about the outrage that people are betting on world events on these websites when this is just a tiny version of the stock market that’s a smidge easier to navigate on your phone than options trading on Robinhood. Someone has simply created a gambling game based on the stock market. And that, too, is nothing new.

Kalshi in early beta testing

Back in the 1920s everyday Americans weren’t allowed to invest their own money in the stock market - and that included the very farmers whose crops were being traded in commodities exchanges. “Bucket shops” proliferated across the country - underground gambling dens where people went to “buy” and “sell” their own version of stocks and commodities with each other, essentially just gambling with each other on what the prices of these stocks and commodities would be in the actual markets. Bucket shops became a popular way for farmers to insure their crops against falling prices. They also became popular spots for con artists to run elaborate schemes with past-posting and inside information. They continued to thrive despite being banned, but eventually vanished as Americans were given increasing access to the stock market - but also as Americans found other ways to gamble.

Prediction markets feel a lot like the modern resurgence of the bucket shop. In a very real way, what is happening on Kalshi and Polymarket is just a funhouse mirror of what happens every day on Wall Street. But I think it’s crucial to remember this one point: everything happening in all of the culture and geopolitical and mentions and weather markets on these sites is simply window dressing for what these companies really are: sportsbooks. If they weren’t allowed to book sports bets, there would be little incentive for them to continue to offer bets on all of these other markets, at least at the scale we’ve seen.

Kalshi’s marketing is completely built around these markets. The tagline for their viral ad is “The world’s gone mad. Trade it.” (By the way, I honestly respect how completely insane and brutally honest this ad is. It’s made with AI, though, so it sucks.) But while Kalshi touts themselves as purveyors of predictive information about the world, they know they are actually just a sportsbook at heart. It’s possible they need us all to focus on the markets about war and famine and whatnot because those markets are central to their argument they’ve made that they are not subject to state sports gambling regulations. So by focusing on them, we may be doing them a big favor.

Personally I like betting on prediction markets. And I think the exchange model is needed in the sports betting ecosystem as well. I’d like to see our laws and regulations figure out how to preserve the space for betting exchanges to exist alongside of traditional sportsbooks. And it looks like we are hurtling towards a Supreme Court showdown on just that question. In the meantime, however, we’re going to continue to see people bet on weird shit, drawing curiosity and scorn in equal measures. All the finger wagging and outrage will do little to squash it, might actually help it, and in my opinion would be better directed at the entire enterprise of finance capitalism anyway.

If you’d like to talk about this with me more, or hear me talk about it, you can tune in to Substack Live today at 2pm EST. I’ll be holding my first of three book club talks for our most recent book club selection: Something for Nothing: Luck in America by Jackson Lears. Today we will be discussing the first three chapters. These will be free to watch live but will be paywalled for subscribers after the fact. If you’d like to read with us, or you’d like to help me continue to produce the podcast and write this Substack, you can become a paid subscriber at the link below.