NerdWallet's Smart Money Podcast
Prediction Markets Let You Bet on Just About Anything — But There Are Risks
20 Nov 2024
Learn how prediction markets work, the legal gray areas in which they operate, and how they could be regulated in the future. What are prediction markets like PredictIt, Polymarket and Kalshi, and how do they work? Is it legal to bet on elections in the United States? Hosts Tess Vigeland and Anna Helhoski welcome Sam Taube, the writer of the Nerdy Investor email newsletter, to break down how event contracts operate, explore the legal gray areas of election betting, and discuss whether prediction markets are a smart financial move—or just gambling in disguise. Then, Tess and Anna break down this week’s money headlines, including the latest inflation figures and what they mean for interest rates, the CFPB’s plan to enforce new click-to-cancel subscription rules, and Spirit Airlines’ Chapter 11 bankruptcy filing. In this episode, the Nerds discuss: how prediction markets work, betting on elections, event contracts explained, investing vs gambling, election betting legality, gambling vs investing, Commodity Futures Trading Commission, event contracts legality, prediction market regulation, prediction markets news, event contracts explained simply, and Consumer Price Index. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices
Full Episode
podcast. I'm Tess Vigeland, in for Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. Today, we're talking about prediction markets. These are companies like PredictIt and Kalshi.
We're going to talk about what they are, how they work, and how the election has raised their profile. Joining us is Sam Taub, the writer of the Nerdy Investor email newsletter. Sam, thanks for joining us again. Happy to be here.
So you've mentioned prediction markets in some previous episodes. You've also mentioned something called an event contract. So let's start with that term. What are event contracts?
An event contract is a type of investment instrument that lets people speculate on whether a particular event will happen or not. That event might be something finance-related, like will the S&P 500 close above 7,000 points by the end of the year? It can also be a political question, like will Donald Trump win the presidential election? Or it can also be something sports or pop culture related.
In the last couple of weeks, people have used Polymarket and have traded event contracts on Polymarket to speculate on the outcome of the Mike Tyson, Jake Paul fight. Event contracts can cover any kind of yes or no question that will get a definitive answer at some point in the future.
And how do these things work?
Event contracts have a face value in dollars, and that's typically $1 per contract. But in the lead up to the event in question, traders can buy yes or no positions on the contract for some amount between $0 and $1 that is determined by the market. It's the market's odds that the thing will happen.
Once the event happens, or doesn't happen as it may be, and we get a definitive yes or no answer to the question, then the contract pays out $1 to whoever was right. For example, suppose you paid 25 cents for a yes position on a contract about whether the S&P 500 will close above 7,000 by the end of the year. then suppose that actually happens.
You'd receive $1 from your 25 cent investment, so you'd be quadrupling your money. And if you bought a 25 cent yes position on 1,000 contracts, you'd get $1,000 from an initial investment of $250.
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