Elections, death, war: Where should regulators draw the line with prediction markets?
As the slate of real-world options grows to include wars, elections and geopolitical crises, experts say prediction markets generate “perverse incentives” and reward informational advantages.
The range of real-world events people can bet on through so-called “prediction markets” seems to grow by the day.
Millions of dollars were wagered in bets placed speculating on the death of Iran’s Ayatollah Ali Khamenei, who was killed in February during the U.S.-led attacks on Iran. Similar bets were placed on the likelihood of war with Iran in the weeks leading up to the initial U.S. strikes, and likewise on whether the U.S. military would capture Venezuela’s leader, Nicolás Maduro, which it did in January.
The $40 billion prediction market industry has also expanded to include climate events. In 2025, users on the betting markets platform Polymarket spent more than $1 million betting on scenarios linked to the Palisades wildfires.
As a federally regulated exchange, Kalshi says it does not list contracts tied to war, death, assassination, kidnapping, terrorism or other violent events that regulators have deemed contrary to the public interest.
But as the slate of real-world options grows to include wars, elections and geopolitical crises, experts say prediction markets generate “perverse incentives” and reward informational advantages that are much more difficult to police in certain real-world scenarios. Even though prominent Wall Street firms have rolled out a wave of new rules in recent weeks, and as U.S. regulators weigh a set of draft regulations about which kinds of bets should be permissible on prediction platforms, critics argue that these markets are uniquely vulnerable to abuses, including insider trading.
“This is what economists call ‘moral hazard,’ where the bets have a causal effect on the world, and people may have incentives to actually bring about those events,” said Chad Lee-Stronach, a Northeastern University assistant professor of philosophy, who studies risk.
That fact raises a glaring ethical red flag as betting on the death of people, war and natural disasters risks becoming normalized.
“When we bet on things, we change our attitudes toward them,” said Rory Smead, professor of philosophy, who is also the Ronald L. and Linda A. Rossetti Professor for the Humanities at Northeastern University. “You can then become invested in something that you might otherwise think is a bad thing, or something that society thinks is bad or wrong.”
Proponents of the leading platforms say they function by reflecting the “wisdom of the crowd,” aggregating thousands of individual judgments into forecasts of specific events.
Here’s how it works. Traders on Kalshi and Polymarket are offered a contract with a binary “yes” or “no” option on whether a specific event will occur. An example taken from Polymarket this month includes “Fed decision in July?,” referring to whether the U.S. Federal Reserve will keep interest rates steady or raise rates by 25 basis points, or or 0.25 percent, when it meets later this month.
Those “event contracts” are then traded much like any other financial asset, causing the price to rise or fall based on traders’ belief in the outcome.
But the “wisdom of the crowd” argument begins to unravel when you look at how these platforms are structured, the experts said. Because traders can see market prices and betting activity in real time, they sometimes abandon their own assessments in favor of following the crowd, Lee-Stronach said.
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Also, the bets are an imperfect measure of confidence. For example, a wealthy trader can risk thousands of dollars while another bettor may stake their life savings on the same outcome. That means the market prices — and, therefore, the implied odds — of such contracts may be determined more by a few people with significant means instead of the collective wisdom.
Those disparities, Lee-Stronach argued, mean prediction markets fail to satisfy the conditions that make collective judgment predictive in the first place.
But not all people see real-world event contracts quite so problematically. Richard Daynard, university distinguished professor of law and president of Northeastern’s Public Health Advocacy Institute, argues that prediction markets can serve the same risk-management function as traditional futures markets, which let businesses hedge against events that could impact their operations or bottom lines.
A trucking company, for example, might buy contracts linked to war to offset the financial impact of higher fuel prices, since wars in oil-rich areas sometimes lead to higher gas prices. Similarly, a farmer might hedge against losses from a flood or heat wave.
“Elections are a tougher case, but if your business would be hired by a Republican — but not a Democratic — administration, or vice versa, then hedging would be appropriate,” he said.
Still, experts’ concerns are not merely hypothetical. This year, U.S. prosecutors charged a Google software engineer with allegedly using confidential internal company data to earn roughly $1.2 million trading on Polymarket, in what authorities described as an insider-trading scheme. Federal prosecutors also charged an individual with profiting from the capture of Maduro through Polymarket.
“If I wanted to design a system that incentivizes insider trading, I don’t know how I would do much better than this,” Lee-Stronach said.
