Episode 39: Jeff Yass - Founder and Managing Director of Susquehanna International Group

0:00This week on Generating Alpha, in an episode unlike most, I'm joined by Jeff Yass, founder of Susquehanna International Group, one of the most successful trading firms in the world. Jeff is a legendary figure in finance, known for applying the principles of poker, probability, and decision theory to markets. Over the past four decades, he's built a global powerhouse, quietly operating behind the scenes of Wall Street, trading everything from options to crypto, all grounded in mathematical precision and rational thought. He's also one of the most influential and private figures in modern finance, making this conversation one of his first interviews ever.

0:37In this short episode, we talk about prediction markets, why Jeff believes they're the future of how we understand truth, how they can improve decision making in business and government, and what they reveal about the power of incentives, information, and human behavior. I really enjoyed recording this episode, and I hope you guys enjoy listening. Thank you, Jeff, for coming on. I really appreciate you making the time. It's my pleasure, Amir. Let's go. So to set a foundation for this conversation, I'd love to kind of start simple. What's your current perspective on prediction markets as a whole, and how are they significant to Susquehanna and yourself?

1:10Well, prediction markets have been a great passion of ours for years. They add tremendous value to the world. You basically can't make a good decision without knowing the probabilities of events happening. Prediction markets are the best way we know how to get the most accurate guess to what those predictions are. So we think it's a fantastic tool that will add tremendous benefits to society. And from a broad perspective, how do you see the kind of evolution of prediction markets playing over the next decade, especially in terms of regulation and gambling legislation? Well, in the gambling world, we're really not sure.

2:01I think the world is coming to the conclusion that a system like the one they have in Europe, like Betfair, where people can buy and sell amongst themselves, is a much fairer system. It will reduce costs tremendously for customers. For customers, currently, the VIG is somewhere around 5%. If you can trade amongst yourself on exchange, we think they'll go down substantially, probably to 1 % to 2%. So that will be a big win for people who want to engage in sports. But our real motivation for prediction markets is to get the truth out there. Our favorite example is during the Iraq war, when George Bush first went into Iraq, he said it would cost$20 billion.

2:58Lawrence Lindsay, his economic advisor said, I think it might cost as much as 50. He was sort of punished for saying that. The true number has come in somewhere between$2 and$6 trillion. dollars. So had the people had a prediction market, what's the over-under line and how much this would cost? Now, I don't think it would be anywhere near two to six trillion, but it would have been substantially higher than 50 billion. Let's say it would have been 500 billion. Then the people might have said, look, we don't want this war. Politicians always tell us that the wars are going to be cheap and quick and fast, and they never are.

3:35So we need a trusted source, And prediction markets would be an objective, trusted source because anyone betting on them is going to lose money if they get their analysis wrong. So had we seen this gigantic number, I think there would have been much more pushback against this war. And something is – predictions markets could be that powerful where they can really slow down the lies that politicians are constantly telling us. And that's really sort of my number one reason why I want to see them thrive. It's almost the people's idea of the truth rather than the kind of tainted idea of the truth that's given to the general population.

4:23Exactly, but also with experts. I mean, you may not know what war is course. The vast majority of people don't know. But there's a small group of people who do, and they would be betting it, and they would be bidding it up to a price that makes sense. So the public who may not – how the hell are you going to be informed about what a war is going to cost if you're a regular person? But if you see experts battling it out and betting on it, then you can trust that number and you could be more of an expert by looking at a prediction market than a politician can who is just either making up a number or purposely lying.

4:59And I also assume in the future that prediction markets can be used and will be used to price more like financial instruments and support other decisions. But how can we protect from prediction market manipulation? Well, in the same way you protect against any other manipulation, if you're manipulating the price, you're going to lose money. If there's enough players out there and you want to get a price up to something for some nefarious reason, you're going to have to lose a lot of money to do it. So if you wanted a bet that it's going to be under$50 billion spending, well, we will bet you hundreds of millions of dollars that you're wrong.

5:48So your plan is going to be very, very expensive and it'll probably be more expensive than just a misleading advertising campaign, which is just my cost in the millions. This would cost in the hundreds of millions. So that will protect the integrity of the markets. And I want to take a step back for a moment. Early in your career, you're a professional gambler, specifically in poker and horse betting. What do you see as the parallels between gambling and prediction markets, and what systemic risks and opportunities do you think are introduced as a result?

6:24I don't really see any systemic risks. I see more truth, more rational, objective probabilities getting out into the marketplace. And I see the systemic risk as politicians telling us stuff that they're trying to trick us. And this is the antidote to that. So, you know, I see, you know, obviously there could be some tiny amounts of manipulation, but that's going to be trivial compared to the amount of manipulation that we have. we have now competitive markets will wipe out any problems that we may see. And from kind of like a broad overview, how do you think your firm and firms like yours will incorporate prediction markets into their daily decision making?

7:16Well, for example, there's an election in New York City in 15 days. Yes. Okay. OK, you know, if you listen to TV, you know, cable news, you get, you know, it's very hard to figure out what the probability is. Like some people say, no, it's going to be too close. Come on. New York's not going to elect someone like Mamdami. But when you look at the prediction market, you see he's a little over 90 percent to win. So if you're making a decision and you want to move to New York, you want to move the business to New York or whatever, you need to know that probability. It's very hard to know just by reading the newspapers or listening to the news.

7:59And to have that actual number helps you dramatically in that decision. Plus, let's say you're a real estate developer and you think that your value of real estate is going to go down by a million dollars if Mamdami wins. You can hedge it. So you can buy insurance. But more importantly, you can find out what the best guess is and you can do it in an instant. You just look at the price. You have the probability you don't have to do all kinds of work. You don't have to read a million articles and call posters and do all the work. All the work is done for you, and you get the best possible number you can.

8:34And that will guide you through all your decisions. For Susquehanna, we're constantly looking at what are the odds, let's say, for presidential election. And stocks are going up and down based on who's going to win and who's going to lose. And we use that number to determine if we think a stock has overreacted or underreacted to the political odds. And I imagine as kind of prediction markets become bigger and bigger and there's more volume, that larger firms will start participating and actually hedging on the prediction markets rather than using outside financial instruments to hedge. So my question kind of around that is you recently joined forces with Kalshi to provide liquidity as one of its primary market makers.

9:16How do you believe the involvement of firms like yours will evolve with the markets? Yeah, that's a great question. Right now, it's still a bespoke product. Institutions aren't really using it. There's a lot of action, but it's mainly relatively small bettors. No giant institution has really showed up and wanted a hedge. Will the Fed raise rates or not yet on these things? But we think as they get regulatory clarity and as they grow in popularity, institutions will show up and there will be Wall Street sized bets placed on these placed on these things. But that has not yet not yet happened. I mean, if you're, you know, a investment bank, if you're Goldman Sachs or Morgan Stanley, you're a little cautious about betting on these things, but you haven't done it yet.

10:08But eventually they'll go away. What I really hope that prediction markets could influence is the insurance business. Insurance in some places is impossible to get. The government caps the rate that you can sell it at. So a lot of insurance companies have left Florida, for example, and you can't insure your home because the price is too low. But if we had insurance bets on prediction markets, you can live in an area, we can put up a price and say, will the winds get above 80 miles per hour in the next two days in your area? And let's say there's a 10 % chance of it happening. If you think that if that happens, you may suffer serious damage to your home.

10:55You might want to bet$10 ,000 on it to win$90 ,000 if it happens. and I'll cover your or cover most of your insurance costs. And you only have to buy it when there's a, you know, when there's a problem coming, they will take out all the adjustable claims, all the expense, all the advertising of insurance, make it much, much cheaper and much more sort of bespoke to what you need to have happen. So, you know, there's enormous expense in insurance and this would reduce a lot of it, make it much easier for people to insure what they really have. It won't be as perfect as an insurance claim where my roof blew off.

11:37Give me my money. It'll be more like, well, the wind was really bad. I know my house is messed up. How messed up, I don't exactly know. But because it's so much cheaper, you can much more easily hedge your risk than you can with typical insurance products. And it's so much more quantifiable. The insurers will obviously try to see how much you need and how much they'll give you and stuff like that. And with prediction markets, it's so much more quantifiable. And as these prediction markets kind of evolve and mature into someday fully regulated exchanges that I imagine, do you think the majority of liquidity will come from large Wall Street firms or do you think they're going to come from retail flows?

12:16I think it's going to come from both. And I think that it's going to create tremendous opportunities. let's say you're just a weather person that loves following weather and hurricanes and probabilities, and you live, you know, in Florida, you can put out your own markets and say, this area, I think is, you know, these are the odds of disruption. And in these areas, these are the odds. And you can have, you know, relatively small businesses who have expertise in this stuff, who now have no way to make any money from their expertise. and they can be putting out markets and they can be making a lot of money and reducing the price for regular people.

12:58Yeah, I think it's incredible. And do you think at all in the future prediction markets can influence outcomes? No, that's like one of the myths that someone's gonna bet. There was that story on Polymarket that the French guy was betting Trump and it was just nonsense. We bet against them. If he bits it up, we'll bet it down. It's not going to influence anything. So all that, that's a fear that comes to mind. And it's not a zero probability that can happen, but it's really vastly overstated. And what do you think is the most significant obstacle to broader participation in prediction markets? And how can one go about removing that obstacle?

13:45uh the the the biggest obstacle is like as you as you ask these questions you can see what could go wrong what can go wrong what can go wrong those things psychologically come right to your mind that these things could go wrong and yes something could go wrong but something is already going wrong so that obstacle as we get used to it will uh uh will go away it's going to take time, but people have fears and they overstate the downside. But as the product takes place and people learn how valuable it is and how much money it can save them, those fears will dissipate. This may take years, but I'm very optimistic that we're going to get there.

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15:04and exclusively for Generating Alpha podcast listeners and viewers, you'll get a$1 ,500 statement credit plus a ton of exclusive perks when you manage your company cash with Rho. Terms and conditions apply. To learn more, visit rho.co slash generating alpha. Rho is a fintech, not a bank. Checking and card services provided by Webster Bank, member FDIC. See your award terms for details. Thank you and back to the episode. And I know you come from a very kind of probabilistic background, but with the rise of decision markets, there's under prediction markets. Is there any type of decision or even prediction that we should deliberately avoid quantifying?

15:47That's a good question. I remember you could put up on a prediction market, should I marry this girl or not? And maybe your friends and your relatives might be more objective than you are. But I'd say that's going a bit too far. So my answer sort of would be no. And what is possible with prediction markets that no one is talking about right now? Or what do you think is possible with prediction markets no one's talking about? I think the number one thing, it will stop wars because every war is exaggerated. How quickly it'll be ended and how little it will cost and how many lives will be lost is always lied to us by our politicians.

16:38And Abraham Lincoln, you know, in the Civil War in 1862, the War Department stopped taking, in the North, stopped taking recruits because they said this war will be over in a couple of weeks. you know he was off by 650 ,000 deaths and stuff so he honestly believed that it was going to be a short quick war and obviously it wasn't in the river you know it still reverberates now you know the horror of the civil war if the people knew how expensive it's going to be and how disastrous it's going to be they will try and come up with other solutions besides besides going to going to war another example I can give is driverless cars there's a lot of opposition to driverless cars because people can imagine, you know, a robot going crazy and killing somebody.

17:26But, you know, this year, in the next 12 months, about 40 ,000 Americans will die on the roads. If we had driverless cars, I'm guessing that number would probably be around 10 ,000, you know, down 75%, we'd save 30 ,000 lives. If we put that up in prediction markets and said, how many lives, you know, in 2030, how many people will die in car accidents? And the number is vastly lower than it is now because people expect driverless cars to happen. It would make policymakers hustle and hurry up and getting driverless cars there because we're going to have this gain of tens of thousands of people who aren't going to die right now.

18:05You know, you say, oh, I don't know. Maybe driverless cars will be good. Maybe they won't. If we had an objective number on it, I think we would see how great how great it is. And we move much, much faster. I think it's an incredible kind of use case of it, especially for quantifying things for policymakers to make decisions based off of. And before I move on to kind of a question or two about advice, what is the one message that Jeff Yass wants to tell the world about prediction markets? If you had to give one message to the world, if you were selling the world on prediction markets, what would it be?

18:42It is. My mother used to say to me, if you're so smart, how come you're not rich? The prediction markets are objective. If you think the odds are incorrect, then go bet it and go put it go put it back into where we're in line where it should be. If you really are smarter than the markets, you'll make a lot of money. You'll do society a favor, which you'll get the price. You get the price right. And if you can't make money, you may want to consider being quiet, like maybe the market knows more than you do. Now, this is going to infuriate every college professor you're ever going to have because they want to be the experts.

19:19But they're not. A bunch of speculators battling it out every day in the market in the marketplace will be vastly greater. It will insult the college professors, which, as far as I'm concerned, is a good thing. I agree. Let me give you an example. When my daughter was 12 years old, Obama was running. against Hillary Clinton in the primary. And one of the most famous political scientists in America was on TV saying, no, Hillary Clinton's going to win. She's up by 30 or 40 points. My daughter, I said, go check trade sports, which was the only place at that time to look. And she said, Obama has a 22 % chance of winning.

19:58So the marketplace knew that Obama was special, that he was charismatic. He didn't have any name recognition. And Hillary did. So the fact that he's down by 35 with months to go doesn't really mean anything. So I use that as an example that my 12-year-old daughter had a better guess of who's going to win that primary than the world's foremost expert in poli-sci. And that's the power of prediction markets. That's an incredible, incredible anecdote, incredible example. And I'm going to ask two questions about advice. The first one being, as a high schooler today, I'm a high schooler, and given all the success that you've had and given all the hiring that you've done, what should students today study?

20:41I would really strongly suggest, I mean, obviously, you know, computer science. You got to be computer literate and you got to understand what AI is coming from. But if you really want to be a decision maker under uncertainty, which is what humanity is, you have to learn probability and statistics. So much of what happens, you know, in the world is you are making a decision. And if you're not really informed on the mathematics behind probability and statistics, you can make a terrible decision. So when you see that there's a hurricane season, there's a lot of hurricanes like, well, is this a big deal?

21:20or there are always a lot of hurricanes? And what's the volatility around hurricanes? Does it vary by a lot? Is this such an outlier? Does this prove there's global warming or is this just a blip? So it's sort of the signal versus the noise. And to be able to distinguish which is which takes some knowledge and some learning, but you really can't interpret events in the world unless you have a firm background in probability and statistics. And I'll give you another little anecdote that like the Russians in 1958 had Sputnik and we were afraid they were going to beat us to the moon. And they did beat us to the moon, but not a man on the moon.

21:58So the United States put in a science program where everybody has to learn calculus. I've heard about that. Okay, so we all got to learn calculus, which we can't let the Russians beat us. So now everyone has to, you know, to get into a good college, you're going to have to learn calculus. To get into med school, you have to learn calculus, which is absurd, but you're never going to use it. but no one learned how to use probability and statistics because it was not, it was considered secondary to calculus. So we have a country that sort of knows, you know, fair amount of calculus, but very little probability and statistics.

22:28And it's just not the way it's just not what's necessary to be a good decision maker, to be a good, to be a good citizen, but it's almost impossible to change these things. So you have to take the effort yourself to make sure that you are literate in probability and statistics. And you certainly understand Bayesian analysis because there's, you know, all these studies done that they asked Harvard, kids in Harvard Medical School who were going to be researchers, some basic questions after they got the data about diseases and they were off by a factor of a hundred. These are very, very smart people, but they didn't know Bayesian analysis and they were ridiculous because it was not taught to them in medical school.

23:09And if you've ever had the frustration of talking to a doctor and saying, Doc, what's my chance of having this? He goes, oh, I don't know. You may or may not have it. It's like, I'd like you to tighten that market up a little bit, Doc. But they're not trained that way. And that's a tragedy. You have to make sure that you go out of your way to get that training. I think that's a very valid point. And I'm currently learning calculus. I think I might do a little statistics education on my own. I probably didn't have to take it on my own. Calculus is wonderful. It's my favorite subject and it's great.

23:42It's beautiful. It's art. It's the key to science and everything like that. But it's of limited value to most people. And I want to ask one more question that I do at the end of every interview. I think I've asked it to 39 people so far. I'm 16 right now. If you were to give one piece of advice to a 16-year-old today, it can be life advice, career advice, even romantic advice. What would it be?

24:09I take it was romantic advice. I mean, I believe in markets. It's like, don't go out with somebody that your friends think is a nutcase. Okay. You know, but you can get caught up. And if you say to my friend, your friends, be honest, I won't, I won't punish you. Try and do it anonymously. Give me a marketplace. Am I making a gigantic mistake? So many lives are ruined because you get involved with the, with the, with the wrong person and no one wants to speak up. So you got to come up with a mechanism. Hey, friends, you're my friend. I trust you. And I'll do this anonymously. You know, should I, should I, you know, is this person too nutty for me to be going, for me to going out with?

24:48You could prevent a lot of horrible relationships from happening there. That would be my number one advice because one of the things that we do in reverse, the bigger the decision, the less time we think about it. You know, if you're buying or selling a stock and it's basically irrelevant what you're doing because the markets are fair, you'll spend a lot of time on it. If you're deciding who to marry or who to have a relationship or whatever, you basically just plop into it without much thought. And one has a gigantic impact on your life and one has a very small impact on your life. Yet we spend much more time worrying about the minor things and not enough time worrying about the big things.

25:26I mean from my limited life experience I think I agree and I recommend anyone who's listening to this to listen to my episode with Andy Duke about decision making I think it's an excellent compliment to this episode but Jeff it was an absolute pleasure having you thank you for coming on I really appreciate it good luck I really appreciate it too it was fun okay bye