Forecasting the Future with Kalshi: America’s First Regulated Prediction Market

0:05Hi, listeners, and welcome back to KnowPriors. Today, I'll be talking with Tarek Mansour, co-founder and CEO of Kalshi. Kalshi is a recently CFTC regulated prediction market exchange that's changing how people forecast future events, like the upcoming U.S. election, the weather, the date of arrival of AGI, and the jobs report. Tarek started Kalshi after studying at MIT and working at Citadel and Palantir. We'll discuss what a prediction market is if it's a threat to democracy, building a regulated exchange and how CalShe fits into the broader financial ecosystem. Welcome, Tarek. Great seeing you, Sarah.

0:41Thanks for having me. This is going to be a super exciting small number of weeks before the election. Can you please explain to anybody who hasn't been on it yet, what is CalShe? CalShe is actually the first legal platform in the U.S. where you can basically bet yes, no on any future questions. The thing that's really cool is like we've basically created a financial instrument where the thing that you're actually buying or selling or trading or betting on. It's not a stock. It's not a bond. It's not a commodity like oil. It's something more intangible. It's actually whether an event is going to happen or not.

1:09So on CalShea, you can basically buy shares of whether it's going to rain tomorrow, whether TikTok is going to get banned, whether Eric Adams is going to get fired as New York mayor, or whether Donald Trump is going to win the next election. Okay, cool. I feel like the easiest way to get a sense is like, let's make a trade. I'm going to share my screen. Okay, here I am. You got CalShea? Yes, it's calshea.com slash elections. This is actually our live election forecast page. You can see that Trump is up 55.45 right now and 19 days left. So we'll see how that evolves. You can go. Yeah, I think you're clicking.

1:44So this is the election market. I'm actually going to let you figure it out. No, no, no. I understand here. I think, you know, Trump at 55%. That feels underpriced to me. Let's go in on it. $267. Oh, I got, I have 150 in cash. I'm going to go all in on this. It feels like a trade I want to make.

2:11Let's see what happens. Market closes when the outcome occurs. Two hours after closing. I'm ready.

2:22Did that just happen? Yeah, it's done. Oh, wow. Okay. Wow. You're to bankrupt me this is too easy yeah i mean it's pretty cool right so i think like the cool thing about this is like you can actually also sell it before so if you click on donald trump right now you can see your position um or on the yeah right here and then you can see your position and you can actually exit it if you want to so you can sell at 55 if you want to you should now but uh so right now obviously if you sold it directly you'd just be paying paying the spread paying the bid ask but if things move if he if his odds go up in a i don't know in a few days or tomorrow or whatever, you can sell it at a profit.

2:58The other thing that's actually really cool, and we launched this just now, is now you have a bet on Trump. You also only get paid interest on that bet. So it gets deposited in money markets and you have treasuries and you get paid 4.1 % interest while sitting there waiting. And so it's cool because usually people say like, hey, these are kind of zero sum type things like you either win or lose. Whereas in here, like whether you win or lose, you're getting paid interest while waiting. Excellent. Excellent. I will go deposit more of, you know, my total wealth given money market accounts now. You recently were involved with a long term kerfuffle with the CFTC to get regulated trades on political events.

3:44So you've been at this for, I think, six years as a company? Yeah, five and a bit. Yeah. Five and a bit. OK. Okay. It's a totally insane thing to try as a startup to go up against the CFTC. Can you talk about that? We hold two core beliefs. I think one, prediction markets have the potential to be the next large thing in financial markets. I do genuinely think that like, you think about it from first principles, like people like to take exposure on things. They like to speculate. Sometimes they want to hedge. Or it could be either betting or hedging. But it feels like the current instruments are a bit like, you know, you have things like, okay, you have stocks, that's fine.

4:23But you also have like options and futures. They're all just so loaded. It's like so Wall Street-y and like people don't really care. But if you think about like prediction markets, what they do is like they achieve a similar sort of like urge or I think they're targeting a similar market. But instead of like these kind of traditional boring financial instruments, you're taking positions on things you care about. Like I have a view on the weather. I have a view on climate. I have a view on AI, which a lot of people have a view on now. And then you can basically take a stake in that. So I think that one, they're going to be very big.

4:53I think so. And then two, I have yet to see a financial market that has gone really big without being properly regulated. I have yet to see that in history. It's always like you have to do it legally, safe, compliant. So our core approach from the start is like legal and safe and compliant and trusted first. A bit like Coinbase, how Coinbase approached crypto. And I've always liked their approach. And so before we launched anything, we spent actually close to three years getting regulated up front by the CFTC. So we've written a lot of the regs. We actually spent literally 14, 16 hours a day for a year and a half doing nothing else other than writing law and regulations for how prediction markets could be regulated in the US.

5:29And we got it done with the CFTC and we got approved. So we were the first actually market in history that actually could do prediction markets legally in the US. So that was one, step one. The thing that we fought over is that after we got approved, the one thing that they didn't want us to do is the U.S. election. There's just so much taboo. I don't know how to explain it. It's like a part of it is Congress. There's a there's a vocal minority in Congress that just hates them. And maybe we can talk about this in a bit. They believe that they're going to break democracy and this is gambling. I obviously totally disagree with that.

5:59But it was funny because, you know, our board at first was like, well, this sounds like a horrible idea. Like when we when Juan and I brought it up to Alfred and from Sequoia and NYC, we're like, hey, we're going to sue the government, a regulator. And they're like, it's never a good idea. It's just a bad pattern. But we took the risk. And it was brutal. It was really brutal. Like going up against the federal government is super tough because it's like the plane, the balance of field is so tilted. The standard to win for you is so much higher than the standard to win for the government. But we won.

6:33And winning felt pretty good. I think the win was worth all the years of pain. And I think maybe this is how it is for, I think, any entrepreneurial journey. It's like you go through all the pain for so long, you have to endure. And then the ups, the highs are so high that it makes it all worth it. So we won this month. And the cool thing now is like it's the first time in 100 years that betting on the election, trading on the election is actually legal in the US. It's finally back to actually being legal. And this time it's actually regulated. And we're the only ones that can run it. So you just, I think, like seeded a whole bunch of threads that we should talk about.

7:09Like, what is, maybe we'll start with one that I think is important. What is the argument against trades on elections? Like, what is the sort of ruining democracy concern? It's two arguments. One, you know, there's a question like, is this gambling? And then the second one is, could they ruin the perception of elections? Is there reflexivity in this? Exactly, exactly. Reflexivity. I think that's the right term. Like could some weird thing go in a loop? And so let me address one by one. So I think the gambling piece is super interesting. I love history and I really love financial history. Like when I got into the business, one of the big reasons, like I loved sort of how did we come up with all these instruments?

7:48I worked at Goldman so that I have you ever been to a Goldman Sachs trading floor or any trading? I used to work at Goldman. So, yes. Oh, great. So, I mean, you see like it is so weird. Like you have like hundreds of traders sitting behind laptops trading things like options and swaps. And the question that always come to mind, like, how do we get here? Like, it's insane. But the thing that's interesting is most financial instruments, really the vast majority, in the early days, they were called gambling. Like, that was the consistent thing against it. It's like a form of speculation on gambling and that's bad for society.

8:19And the example I love to quote when it comes to the gambling piece is like, so in 1905, when Grain Futures got legalized in the US, it was a Supreme court decision. And grain futures now, we think of it as like the most boring, like financial, like, you know, hedging farmers, like, you know, but at a time they actually would call it gambling. This new asset that people were like, hey, a lot of people are speculating, so it shouldn't be allowed. And then the court decided like, no, fine, some speculation is happening. Like it does happen in the stock market, but that doesn't mean these markets are not important.

8:46And I think it's the same thing here. It's like, it's crazy to me to think that like taking a stake, a position in the election is the same thing as like betting on the dice roll. Like that doesn't make any sense to me. Elections are real, that people have economic consequences coming out of the elections and people may want to hedge it or people may want to, even the forecast is important enough for these markets to exist. I think actually it's like worth contextualizing a little bit, like why futures exist to begin with. Yeah. Right. You mentioned like hedging, but just to sort of complete the basic story there, like going all the way back to like Japan, And Dojima Rice Exchange, like the original function of futures markets, as I understand them, was like for farmers to hedge price changes.

9:29Right. You know, even before 1905 U.S. green futures. And so smoothing out or allowing people who have real economic stake in something to protect themselves was the original premise. What is the difference between like gambling and trading? So I guess let's differentiate between two things. There's a stock market and the function, why it exists. And by the way, a lot of people, you know, I mean, I don't want to make this political, but I have to because my business has been pretty political. But like those are the ones of the world where even the stock market has a lot of speculation and we should limit it in a variety of different ways.

10:01That would be, that's a horrible idea. We should not do that. But the reason it exists is capital allocation, right? You're moving capital from people that have it to people that need it, very simply. And that makes it worthwhile to exist. And that's why hedge funds exist. And that's why all these, you know, we have Wall Street. The futures market, the derivatives market, where it's a bit different. It's not capital allocation, it's risk transfer. And I love that notion. I love that notion so much. It's like, it's even more neat. It's like you're transferring risk from people that like have it, but cannot bear it to people that don't have it, but can bear it.

10:33They want to diversify, they want to buy it, et cetera. And this applies to the example of grain futures or rice futures or pork belly futures, the kind of really old school stuff. And the interesting thing in these markets, like farmers are hedging, like you said, their ability to hedge allows them to have more forecastability. Like, hey, I'm planting a batch now. What price am I going to be able to sell it at in the fall? It makes it a higher quality business to have that forecastability too. Without it, you have too much unpredictability. And what happens with unpredictability is you have less of these businesses.

11:03It becomes a harder business to run, so you get lower supply of grain. So, you know, we just actually established that no grain futures today would have resulted in higher prices for bread. That sounds like a horrible thing for society, actually. It's a good thing that we have them. Now, that is different from gambling, right? Like grain prices or hurricanes or Brexit happening or not or election Trump versus Kamala winning, that's a risk that exists already, right? Like it's not like you and I are creating this risk so that we can bet on it. This exists already. And some people, like if you run a climate tech company, you're obviously better off if Kamala wins than if Trump wins.

11:41If you run a crypto company, you're better off if Trump wins than Kamala. You have a real tangible binary risk that you may want to insure against. That's very different from you and I going and doing a roulette spin so that we can spec it. That is an activity that's recreational. That I don't have strong views on gambling or not. I think people should be able to do whatever they want with their money. But that's different. That does not have benefit for society that go beyond just having fun. Right. And so, yes, I think hedging is a core pillar. But then there's actually another thing that people don't talk about.

12:09It's called price basing in these markets, which is it gives you an indication of price. Right. Like farmers without a futures market have no idea what this thing is going to sell for in the fall. The futures market actually gives them an indication of what it's going to sell for. And I think the prediction markets take it a step further. It's actually the price is equal to probability. It's even cleaner. It's like, who's going to win? Right now it's saying 55 % Trump. Is TikTok going to get banned? I think I forgot right now. I think by May it's like 35%. It doesn't look like it's going to happen.

12:37And like you're pricing the future. And I think that's another really neat concept because if you price the future, then you can, you're smarter, right? Like you can make better decisions about what's going to happen. If you're a TikTok creator, now you're not going to, you know, whether the likelihood of TikTok getting banned is a life or death situation for your business, basically. They are related. Yeah. Right. I mean, I have graduated from poker to informed investing. There is speculation in all markets. That's a fact. Right. And speculation is like you bring some money to make more money and, you know, it's something you don't really control.

13:13Without it, you don't get a liquid market. Right. If people don't have that, they're not doing that. You don't the market is not going to have any activity. It's impossible. And so there's been a kind of rule of markets like you have to have speculation. You have to have some of the de-gens. You have to have some of the informed. You have to have a little bit of everything to have a vibrant marketplace. People love to speculate. So we started different forms of speculation slash betting slash gambling before we even could write. Most people don't know this. We actually used to play games. Like we used to do it with rocks, like, and then, you know, people get a reward if the rock comes your side and you pay something if it doesn't.

13:49And that was before we had actually like a language. It's probably something related to evolutionary psychology. It's interesting because when you confine it to the, okay, I'm placing a bet on Trump or I'm placing, you know, I'm betting on something specific, you know, sure, you kind of, we grasp as like, this is people betting on something. But I think like if you broaden a bit more to life, like we are constantly making decisions where we're risk adjusting. We're taking risks, sometimes not taking the risk is another form of risk. Like life is risky. You walk outside, you might get hit by a bus.

14:19You're taking a risk by walking outside every single day. I believe we have been conditioned to risk taking. Humans are conditioned to risk taking. You know this thing that Nassim Taleb talks about when you're evaluating risks, like your grandma is better than most data scientists. Have you ever? No, no, no. Explain. So basically, there's this whole thing in like measuring risk where unless you're talking to like a PhD or a research lab that's extremely specialized in a very specific form of risk. Asking your grandma is actually a better rule of thumb than actually doing any data analysis. Like COVID was a typical, like you had a bunch of people, you know, like, you know, the midwit meme, like they did a bunch of analysis like, hey, COVID and it's probably the view dying is lower than a bus and whatever.

14:59If you ask your grandma, your grandma would be saying like, hey, wear a mask or stay at home. I guess there's two insights. One, generally speaking, don't listen to data scientists. Data science is mostly bullshit. Health papers and stuff like most of them are just total garbage. What makes them garbage? It's just so easy to fit the data. And it's so hard to actually make sure, like check how the data and like it's just reproducibility and just reproducibility. The sampling is and even if it's reproducible, there's so many things that could go wrong and the incentives are off and you have to publish in nature.

15:27So you have to do all sorts of weird things. It's true that grandmas are surprisingly good at risk management. They have a very good intuitive understanding of risk. Humans, we've evolved to be fairly good with risk, actually. And even current society actually rewards risk takers better than non-risk takers, right? Like, you see it everywhere. Is it actually that much more risky to place a bet on something you're interested in, or even something that's totally garbage, like, you know, in a casino, than starting a company? Like, I think about these things a lot. like, I would argue starting a company is even crazier.

16:01So how do casinos actually advertise their products? They like show you the one person that made$300 ,000 in the slot machine. People get excited and everyone goes and does it. And, you know, everybody knows the odds, et cetera. Well, it still kind of does the same thing if you think about it. Like, you know, they show like Airbnb and Coinbase and then you have like a flock of people basically going in to start a company. Now, the big difference is obviously starting a company is actually net positive for society versus like playing on a slot machine is not. But I'm talking more about the notion of risk.

16:30Like we all love taking risks. It's just more fun. Living a life where you're taking risk is just such a superior life than one where you're just not taking any, right? So yeah, take more risks. I'm taking a lot. I believe generally the principle, I think it depends on what the profile of risk is. And I think Nassim Taleb is fundamentally pretty conservative or technophobic in some ways. And I'd be like, hey man, Like, I am investing in AI. My grandma cannot take these risks. So I think it depends. I mean, he's more on the short side. He's like more of the pessimistic negative side. Kashi's just a fascinating business.

17:09Used to work at Citadel. You are starting this market from scratch. I think the day we are talking, you know, like there's$16 million in on the election plus my$150. Yeah. Talk a little bit about how you think about designing a healthy market. Yeah. I mean, we just launched the election. We're obviously launching pretty late because we just won the lawsuit. Yeah. The markets just take time. They need catering. They need watering. But they grow. And they're growing. I mean, actually, we're growing like, I think the last two days have been like 6x day over day in terms of like signups and in terms of volume.

17:43So it just takes time. But I think it's ramping up very fast. Exchanges are notoriously very difficult businesses to build. They're some of the hardest. because you have the marketplace angle, which is always hard. And exchanges, like you have to bring in the liquidity and that's really hard to ramp up and takes a long time. How do you think about retail versus like large market makers and institutional monsters? I think of it as more of a falling on the spectrum that goes from like lots of trades, small size to less frequent trading, but big size. So I think the way that the market evolves is like, because we have lower liquidity now, we target retail and then we scale our liquidity as we scale with retail.

18:18and then we scale a type of customer over time. You build an initial layer of liquidity. And we already, I think, have that at CalShe, where now we have this community, this very dedicated community of people that forecast these events. They price them. And then as they price these different events, you know, like, will it rain tomorrow? Is climate change getting worse or better? Is COVID going to come back? As you price them, the mere fact of getting a price, you can ramp up liquidity. You can get more and more liquidity over time. And as you get more liquidity, you attract the large institutions that may, if you're a big institution, you want to hedge against cyber risk or a new bill that may pass in Congress that you hate or other.

18:53So it's, I think, a progression. That's how we think about it. Election specifically, we're seeing a lot of institutional flow. It just said, like, we're a bit late in the game, but the institutions take time, compliance take time to onboard. But we're seeing a lot of institutional flow. There is demand for, like,$10 million,$20 million. Actually, there is demand even up to$100 million trades. We have three weeks, so we're going to have to figure out if we have enough time with our compliance departments to onboard to Calci. But if we do, I think we'll see$100 million trades. It's going to be really cool.

19:19How do you think about leverage? So there's a few things. Like this is like a risk-on product, right? This is not like if you buy, you know, S &P, it doesn't move like maybe like 0.5 % on a typical day, right? It moves more like 10 % on a typical day. So it's already pretty volatile. we have been thinking about how could we basically introduce margin and leverage into the system because when you introduce leverage there's more trading you're right like one dollar can create much more trading activity and we want to introduce more leverage over time but the system gets riskier a little bit of context so we own now as of this year actually one of the like there's a handful of clearing houses in the u.s that can actually clear that can move and hold dollars for trading, for trading derivatives.

20:10Like this happened after 2010. So when the crisis happened, Dodd-Frank came in and says, every like trading of derivative has to go through central clearinghouses. And the reason for that is like, you and I cannot trade with each other anymore like banks used to do. We can't be counterparties because if I, and what happened at times is I defaulted, then you defaulted, then Alfred defaulted, then Kelly defaulted, everybody started defaulting, all the banks defaulted and it was bad for the entire economy. Now it's all centralized in one place where the U.S. government can see the risk and then that one place can basically like manage that risk appropriately.

20:45That's clearing houses. So we actually, as of this year, we own one of the handful. The question is like, when do we, when and how do we introduce the ability for people to take positions without putting all the cash up front? But now you're using credit risk right into the system. I want to do it. I want to do it with the next, next maybe 12 to 18 months. but we're going to have to get really smart on sort of like like okay if Sarah shows up to the exchange like how much leverage should we give you should we let you do 10 to 1 should we let you do 100 to 1 should we let you do only 2 to 1 that becomes like that's a tough question to answer actually yeah I mean it feels like there's a lot of decisions to make there right yeah guaranteeing trades enforcing margin requirements exchanges and clearinghouses are very complex.

21:29And so if you think about what's a good, like maybe the 2008 futures bubble. Yeah. Like there are versions of this that are less healthy and also like speculation is going to exist in any market. And, you know, people want liquidity, right? So I think it's a really interesting problem to go solve. If you had leverage, I mean, if you let people just do it without pre-funding, you definitely expose the system to risk. Again, like risk is fine. We just need to figure out how to manage it. And I think for us, like this is one of those things like where the government is actually very, very tough on on us and clearing houses to do.

22:03Like we really need to be kind of really buttoned up to get to get this to get this done. And I think we'll do it. I think we'll just have a lot of work to do to get there because things can go really wrong when they do go wrong. Right. Yeah. I mean, 2008 was pretty bad. Maybe like just thinking about, you know, the coming election. How should people think about prediction markets versus polling? There's a lot of confusion around this. Polling is asking people who they're going to vote for, right? Like, so assume you can go to, you can survey every single person in Pennsylvania and then ask them, you know, who are you going to vote for?