One of my pet theories is that managing surplus is every bit as much of a challenge for society as managing scarcity.

When a few monks learned to distill some wine into brandy, it didn't cause societal collapse. Once every English farmer learned how to turn grain into gin during the 17th and 18th centuries, however, the results were disastrous.

When a few farmers built hand pumps that drained some water from nearby desert aquifers, it wasn't necessarily a problem. Once anyone could buy an electric well that penetrated hundreds of feet below the desert floor, however, catastrophe ensued.

Which brings me to prediction markets.

Academically, prediction markets are conceptually interesting in a wonkish sort of way. New York City presidential betting markets, for example, were popularly known for their relative accuracy during the early 20th century, not only because they successfully predicted who would be elected but also because the markets predicted which elections were likely to be close.

After the Iowa Electronic Markets (IEM) was established in 1988, it not only predicted correctly that George H. W. Bush would defeat Michael Dukakis, it even came within 0.2 percent of predicting Dukakis' vote percentage. The relative accuracy of these prediction markets led many to wonder if they were an underutilized aggregator of information — the Pentagon's Defense Advanced Research Projects Agency briefly attempted to apply this insight after the Sept. 11, 2001, terrorist attacks by creating the Policy Analysis Market, which would have allowed participants to place bets on political and economic events in the Middle East.

Crucially, however, none of these markets accepted bets on anything that popped into someone's head, nor were these markets open to just anyone sitting on their couch.

New York presidential markets were arguably the most open of all, but access to them was still limited by physical proximity and familiarity with Wall Street securities trading practices. Participation in IEM, meanwhile, was originally limited to members of the University of Iowa community. Though IEM is now accessible to anyone, the goal of the project is to improve prediction accuracy, not to make money — consequently, traders can only place up to $500 in their account and markets are established by IEM, not by participants themselves.

Access to these and other early prediction markets was thus limited enough to ensure that participants brought some information to contribute to the market. Additionally, by keeping the scope of each market narrow, opportunities for insider trading were limited — it's much easier for me, for example, to profit from my knowledge of whether I'll publish every other Tuesday than it is for me or anyone else to get private information about something with the size and scope of the next presidential election. Consequently, economists have pointed to the predictive success of such markets as demonstrations of the efficient market hypothesis — that market prices reflect the collective public and private information that traders have about whatever is being predicted.

But what happens when people are anonymously allowed to predict absolutely anything at all for unlimited amounts of money, all from the convenience of their back pocket?

If the past few months have been any indication, the answer is a societywide demonstration of Goodhart's Law — an economics principle that is often summarized to state that "when a measure becomes a target, it ceases to be a good measure." Members of the Israeli military, including an Israeli Air Force major, used classified information to place bets on Polymarket. Polymarket also saw a sharp increase in bets shortly before the successful capture of Venezuelan leader Nicolás Maduro, the invasion of Iran and the death of Iran's supreme leader, Ayatollah Ali Khamenei. 

These and other similar incidents have led analysts to wonder how many of these bets are profiting from private information — classic insider trading, in other words — and how many are actively creating private information by timing lethal action to maximize personal gambling returns. What if you're an officer planning a mission to rescue an American pilot in Iran but you can time the recovery to maximize how much money you'll win on Polymarket? Why engage in insider trading on whether a nuclear weapon will detonate — an actual betting market hosted on Polymarket until it was "archived" last month — when you can place a bet and press the button yourself?

As any experienced sports bettor will tell you, that's just throwing the game. But why put in the effort to throw the game when you can just throw how the score is reported?

A military correspondent for The Times of Israel reported directly and through The Washington Post and The Atlantic on what happened when $14 million in Polymarket contracts were tied to a 150-word blog post he published — he received threats against his life and his family. Meanwhile, a since-fired employee at the Institute for the Study of War surreptitiously edited a map of the war between Russia and Ukraine to tilt a Polymarket prediction market regarding the timing of the outcome of a specific battle.

The efficient market hypothesis holds so long as market participants are trading based on actual information. Once participants learn how to manipulate and alter information to better support their bottom lines, all bets are off.

Unsurprisingly, given the growing amount of insider trading and market manipulation being conducted on Polymarket, most participants seldom make a profit. Third-party analysis of the cryptocurrency wallet addresses used to gamble on Polymarket revealed that only a small minority of Polymarket users — between 7.5 percent and 30 percent — realize any profits.

Like all prediction markets, Polymarket is regulated by the Commodity Futures Trading Commission (CFTC). Other similarly regulated markets, such as Kalshi, have argued that CFTC oversight prevents them from engaging in "death markets" such as those used to predict the ultimate fate of Iran's supreme leader (Kalshi declined to pay out). That argument, however, assumes that the CFTC — which currently has only one sitting commissioner — is willing to stand up to Donald Trump Jr., the son of the current president who serves as a strategic adviser with Kalshi and is on Polymarket's advisory board.

The current focus for state regulators, at least in Nevada, has been the impact of prediction markets on sports wagering, which is why Kalshi has been banned in the state for the past few weeks. This has also been reflected by the attention of Nevada's congressional delegation, notably Rep. Dina Titus (D-NV) and Sen. Catherine Cortez Masto (D-NV), who are sponsoring or co-sponsoring legislation that seeks to prevent prediction markets from offering bets on sporting events or casino games. These efforts reflect a combination of naked parochialism — Nevada's casinos certainly appreciate the state's willingness to protect their sportsbooks — clothed in the notion that politics is the art of the possible.

Perhaps President Donald Trump is more likely to sign a bill that only lightly cuts his son's potential profits to take some of the political heat off of his son's entrepreneurial endeavors than he would be to sign a categorical ban on these platforms.

What is currently politically possible, however, may not meet what is necessary.

Sen. Richard Blumenthal (D-CT) introduced legislation that removes oversight of online prediction markets from the CFTC and places it in the hands of states where it belongs. Reps. Adrian Smith (R-NE) and Nikki Budzinski (D-IL) have introduced legislation to ban members of Congress and federal officials from trading in online prediction markets. Rep. Greg Casar (D-TX), along with several Republican and Democratic co-sponsors, has introduced the Banning Event Trading on Sensitive Operations and Federal Functions (BETS OFF) Act, which bans gambling on acts of terrorism, assassinations, wars or other sensitive events. 

All of these measures are commendable and should pass in some form. States have more experience and far more resources to hold online prediction markets accountable — just as importantly, they're collectively harder for a single presidential family member to influence and manipulate. Members of our government should also not be permitted to use information gathered in their employment to gamble on prediction markets. Gamblers should not be encouraged to start wars or engage in assassinations to win bets on such events. These are all commonsense reforms.

Meanwhile, Washington and Arizona have filed charges against Kalshi for categorically operating as illegal gambling platforms, objecting not just to the platform's popular sports betting markets but to all of their gambling activities. If additional states categorically reject the idea that online prediction markets are permitted to operate within their borders in any capacity without state and local oversight — whether betting on sports or otherwise — that might help Congress reconsider what is possible in relation to regulating online prediction markets, if not banning them outright.

David Colborne ran for public office twice. He is now an IT manager, the father of two sons and a recurring opinion columnist for The Nevada Independent. You can follow him on Mastodon @[email protected], on Bluesky @davidcolborne.bsky.social, on Threads @davidcolbornenvor email him at [email protected]. You can also message him on Signal at dcolborne.64.