Federal Regulators Should Approve Election Prediction Markets

The US Commodity Futures Trading Commission (CFTC) continues to wrestle with how to best regulate prediction markets. The commission is expected to make a decision as soon as this week on whether the startup Kalshi can offer a market on the outcome of the upcoming midterms. Approving Kalshi’s submission would be a step in the right direction for the commission and promotes the public interest. Election prediction markets have proven to be a powerful tool for forecasting elections and are typically more accurate, timely, and complete than conventional methods.

Kalshi was designated by the CFTC in 2020 as a Designated Contract Market. The company facilitates the trading of a wide range of contracts for predictions on phenomena such as peak inflation, the results of the Federal Reserve’s December interest rate–setting meeting, China’s gross domestic product growth, and new COVID-19 variants emerging in the near future. In July, Kalshi asked the CFTC for permission to launch two contracts related to the outcome of this fall’s midterm elections.

The CFTC has previously denied similar requests, ruling that election prediction markets are online gambling and do not serve the public interest. This time, the CFTC launched a public comment process to inform its decision on whether an election market creates more risks or actually helps hedge against them.

It would be a mistake for the CFTC to limit these markets and the valuable forecasting information they provide. In typical financial markets, the price of a stock, bond, or commodity future is in a sense a forecast of the value of an unknown future, be it the value of a commodity or a business’s expected revenues. The forecasts represented by these prices provide information that drives decisions in a variety of sectors. Farmers, for example, routinely use futures markets to decide which crops to plant. Political prediction markets can do the same for those who are navigating a constantly evolving political landscape to manage risk and maximize their organization’s impact.

Prediction markets offer several benefits across the private and public sectors. First, tools such as public polling offer a snapshot in time and often lag in reflecting consequential shifts in public sentiment as conditions change. In contrast, prediction markets allow for real-time incorporation of new information signaled by the price of the contract. 

Second, the market mechanism creates a financial incentive for individuals to express what they believe will happen, not what they hope will happen. Participants are only paid for being right, even if that outcome is not necessarily what they wanted. This too is better than solely relying on many of the alternatives. For example, political analysts provide important insight but may have financial incentives to generate support for a particular position or have their own biases incorporated into the analysis. As a Populace survey recently found, social pressure can sometimes lead individuals to share what they believe is the “right” opinion even if it differs from their private views, which can complicate responses in polling and focus groups. 

Finally, participants may not individually have all the information, but the market mechanism creates an incentive to reveal what they know, which is then pooled to produce the best estimate or forecast, reflected in the price. This kind of information is useful for making better strategic decisions in both the private and public sectors, particularly in heavily regulated sectors that need to navigate dynamic policy and political environments. Reducing even a little uncertainty can unlock the capital to support entrepreneurs tackling climate change, improving student education outcomes, or expanding access to health care.

Far from undermining election integrity, these markets can help strengthen it. Jason Furman, the chair of President Obama’s Council of Economic Advisers, noted in his comments to the CFTC that “election markets can also allow businesses and others to participate directly and hedge against the consequences of elections. Absent prediction markets businesses have no simple and transparent way to hedge against these risks.”

We need a clearer regulatory road map that would allow for more, not fewer, prediction markets covering not only election outcomes but other events. For example, we should leverage prediction markets to better manage our pandemic response. A 2005 prediction market correctly predicted seasonal flu activity 71 percent of the time nearly two weeks ahead of clinical data that year. Such a market would have been invaluable to inform our nation’s pandemic response and indeed could still be valuable information given the uncertainty of future COVID-19 waves and variants as COVID Collaborative’s Steven Phillips has suggested.

Kalshi’s proposal does not pose a risk to the integrity of the US election system. Election futures trading is a normal procedure in other established, strong democracies such as Australia, Ireland, and the UK. The valuable insights provided through a regulated election market far outweigh any of the potential risks.