Since the early 1800s, opinion polls have helped Americans navigate our country's politics by showing a snapshot of popular opinion.
These polls have often depended on academic institutions, media outlets and independent firms to carry out surveys and process data to determine probabilities. Sometimes polls query too few people, or their respondents may skew toward a bias.
Prediction markets take it a step further. Using these mostly online platforms, people can gamble on nearly any event — including election outcomes.
Prediction markets establish odds based on the insider knowledge of a few and the whims of many others. Experts and advocates are calling them a growing type of political pace-maker — for better or worse.
Jack Such, a spokesperson with Kalshi, explained how the company thinks of prediction markets as an observational tool in politics.
"They're really this kind of tool for using the sort of like wisdom of the crowds, because all these people are participating in the market, and then kind of filtering that opinion through the fact that there's money on the line," Such said.
He said the stakes help control the accuracy of predicting any given event.
"It's kind of this theory that when someone responds to a poll, when someone says something on social media, there's not really an incentive for them to say the truth," he said. "But if someone says something and says, 'I'm going to put money behind this,' that is a little bit more of a trustworthy statement."
Some civic engagement advocates worry, though, that the very nature of prediction markets could cause apathy in voters who may feel elections are predetermined.
How prediction markets work
The Commodity Futures Trading Commission (CFTC) is the federal regulatory agency responsible for ensuring safe and transparent markets and has been since the 1970's.
The technical term for a prediction market in the investment and regulatory world is a "binary option" or "event contract."
Per the name, an investor can enter a contract betting either "yes" or "no" on the outcome of a certain event, and depending on what others making the same or opposite bet think, the probability of a given outcome is calculated.
The CFTC points to two major use cases for trading in prediction markets: real-world risk offsetting, or hedging, and risk-based profiting.
"As one example, a citrus farmer might buy a weather event contract to hedge against losses that might be caused by a sudden freeze," the federal website reads. "Event contracts also provide a way for traders to seek profits by taking risks, or speculating."
And speculating on the outcomes of politics is becoming increasingly common.
Such, at Kalshi, said the system can work as an effective predictor of political results because every contract trades between $0.01 and $0.99.
"Then, depending on what happens in the world, each contract pays out either a dollar if you're right and zero if you're wrong," he said. "They're designed this way basically for convenience's sake, because what that means is that it's very easy to map the price of the contract to the probability that the event will happen."
Take the market predicting whether Oklahoma's gubernatorial election will be won by a Republican or a Democrat. Based on $66,548 worth of contracts as of August 4 at 3:03 p.m., the odds say a Republican has a 93% chance of taking the cake in November.
"That just means that the contract is trading at $0.93," Such said.
So, if you bet on a Republican winning, your potential profit yield is the difference between 93% and 100% — almost 7 cents per dollar.
If you bet $10 and a Republican wins, you get your $10 back, plus 66 cents. If you're wrong, you lose your $10. Every month, Kalshi users earn a variable interest rate (sitting at 3.25% as of Aug. 4) on the total dollar amount in their account.
The crowd's wisdom about Oklahoma's election outcomes, and the dangers of following it
There were 34 active prediction markets related to Oklahoma elections, as of 4 p.m. on Aug 4.
They allow for wagers on whom the GOP will nominate for governor, attorney general and lieutenant governor in this month's primaries. Or who will win any of the Congressional House and Senate elections (and their margins of victory). Or whether the total turnout for those races in November will be above a certain number of voters.
The most valuable market in Oklahoma politics right now revolves around the Republican nominee for governor, at nearly a million dollars worth of contracts. Three-quarters of the crowd has candidate Mike Mazzei winning against Gentner Drummond.
On Aug. 1 at 3 p.m., ahead of the candidates' recent debate, the margins were wider at 80% Mazzei and Drummond at 18%. Odds can change from day to day and even hour to hour.
If you're looking at these markets and thinking it's a pretty safe bet that Mazzei will win the GOP nomination, you're not alone.
Such said that 75% of Kalshi users never deposit a dollar into their account, suggesting they use the platform to browse its insights rather than to wager. And while the actual number of users is not public, it's in the tens of millions.
The markets are mostly accurate, as shown in a June study by The Washington Post.
"That's not to say they can predict the future because, you know, they're probabilities, they're not predictions," Such said. "But to the extent that they can be useful as a forecasting tool, you know, they're very much the best in the world at that."
Andy Moore is the founder of the civic engagement non-profit Let's Fix This and the executive director of the National Association of Nonpartisan Reformers. He said he worries about prediction markets could mean for voters and civic participation.
"A lot of voters feel like their vote doesn't matter because, you know, it's been decided by the elites on who's going to win and who's going to lose," Moore said. "And if this solidifies that. I think it runs the risk of really discouraging participation."
But that's not how elections work, he said.
"The outcome of elections are only decided by who actually shows up on election day," Moore said. "And there are plenty of examples of elections that were upsets or unexpected outcomes, simply because one group of voters decided that they needed to show up and change that."
Sometimes, the prediction markets surrounding an event don't line up with what traditional polls say.
Case in point, the New York Times' latest polls show the Mazzei versus Drummond race being basically split down the middle. One poll shows Mazzei up by a 6-point margin, and the other shows Drummond up by a 2-point margin.
Moore said the differences between prediction markets and traditional polls should give Oklahomans pause.
"Either the market knows something that the polls don't, or they're just wrong," he said.
For his part, Such said prediction markets aren't a viable replacement for traditional polls.
"Part of the information that traders in the prediction markets use to try to help place probabilities and like what the fair value of each contract is, is polling data," he said. "So I would say we very much view these as complementary to polls."
Moore said it's important to look at the participation numbers on Kalshi (by looking at the total market value). In a state like Oklahoma, it's likely people actually putting money on these races are few in number, relative to the number of possible voters.
"The hard truth is that there are a lot of people who do put money into the prediction markets based on a hope, what they hope an outcome will be," Moore said. "And that's a good way to lose money."
