Prediction markets are making a 150-year comeback

10:19Koleman Strumpf:And lo and behold, at midnight the night before Election Day, we ended up predicting the outcome of the popular vote within two-tenths of one percent.

10:28Paul Rhode:That result outperformed major polls, including Gallup, Harris, and CBS New York Times. It was so effective that Robert and his colleagues thought, we'd like to do this again next election, this time with a bigger sample size.

10:43Koleman Strumpf:So we went to the Commodity Futures Trading Commission and asked them whether they would give us permission to operate nationwide.

10:49Paul Rhode:And just so I understand, what was the law that you needed to get around?

10:54Koleman Strumpf:Well, anytime you have people exchanging real money on the outcome of something, the question is, is this gambling? And even though there's some form of regulation that's going to oversee you.

11:06Paul Rhode:Back then and now, the body that oversees that regulation in the U.S. is called the Commodities Futures Trading Commission, or the CFTC. It's been in charge of commodity futures, like markets that set the future price of grain, since the 1970s.

11:22Koleman Strumpf:They've issued us what they call a no-action letter.

11:25Paul Rhode:That letter was basically like a permission slip. As long as the Iowa electronic markets followed a few set rules, the CFTC would allow it to do its thing.

11:35Koleman Strumpf:And the rules were, we stayed small. We couldn't accept the cons over$500. And we didn't engage in paid advertising.

11:43Paul Rhode:So they could only run markets on presidential elections. Sports were off the table. And the Iowa electronic markets did not make a profit. Between 1988 and 2004, the Iowa electronic markets grew from a one-off experiment to one of the most reliable predictors of American presidential elections. During that period, its predictions beat traditional polls 74 % of the time. And as the market continued to grow, so did the public's interest in it.

12:14Koleman Strumpf:I'm Bob Edwards, and this is NPR's Morning Edition. If you think you know who the next president of the United States will be, there's a place in Iowa where you can back up your convictions with a buck or two. What started out as a research project...

12:30Paul Rhode:At what point did you realize that people outside of the University of Iowa, outside of your orbit, were starting to pay attention to what you all were doing?

12:39Koleman Strumpf:Well, we started to get a lot of national publicity. This was different enough that before we knew it, the Wall Street Journal and the Financial Times of London and...

12:50Paul Rhode:NPR.

12:51Koleman Strumpf:NPR and a lot of the television media started picking us up because it was just so different, right? I mean, who had ever made a mark on an election?

13:00Paul Rhode:Oh, so they thought this was the first time something like this was happening.

13:04Koleman Strumpf:That's right. That's right.

13:06Paul Rhode:But as someone else would soon discover, it wasn't the first time. Not even close. Enter Coleman Strumpf.

13:14Robin Hanson:I am an economics professor at Wake Forest University. I've been teaching a course on prediction markets for almost 20 years.

13:22Paul Rhode:Coleman may be an economist, but his driving interest is in human behavior. On top of prediction markets, he's written papers about illegal file sharing, tax evasion, and the economics of addiction. And he says if you want to understand where prediction markets came from, just head down to your local horse track.

13:46Robin Hanson:My uncle used to take me to the racetrack and have me bet on horses. I guess I was already a social scientist in training at 10 years old because, first of all, yes, back many, many years ago, you could be 10 years old and go to a racetrack and bet. And I couldn't even reach up to the counter and nobody seemed to care very much. But it was as interesting as much to me to watch what everybody else was doing. And a lot of things that I see when I look at markets today, I could sort of first see then.

14:16Paul Rhode:Watching people read the odds and make bets taught Coleman something essential about gambling. Winning makes people feel good. And the longer the odds, the better the winners feel.

14:30Robin Hanson:I remember when I was younger and I was watching people do it, if somebody would bet on a long shot horse and that horse would actually win, the person would not only win a lot of money, But they were going around to all their friends saying how smart they were because they managed to figure out this very, very unlikely thing from happening. And I sort of realized that's, you know, part of the sort of psychology of these markets is people like to be smart. People like to use this as a way of sort of showing off their smarts of how they figure these things out.

15:00Paul Rhode:I should say here, there's been a lot of back and forth over the years about whether or not prediction markets are really just betting dressed up as something fancier. Or if you're looking at legal definitions, whether they might count as gambling. We're not here to litigate that. Coleman's point is as long as people have been putting money on things, whether it's on the stock market, in insurance, or at the racetrack, social scientists and economists have been able to learn something about us from those beds. So flash forward to the 2000 presidential election. George W. Bush versus Al Gore. one of the closest presidential races in a century.

15:39Paul Rhode:Coleman was doing research about election forecasting at the University of North Carolina, and he was keeping a close eye on the Iowa electronic market.

15:49Robin Hanson:I was writing a paper about the Iowa electronic market when my then-colleague was at the University of North Carolina at the time, Paul Rohde, came by my office asking me what I was doing, and I said, I'm looking at the first political prediction market we have. And Paul, who is an economic historian, said, nope, that's totally not correct.

16:11Koleman Strumpf:He was MIT and I'm Stanford. And a lot of times creative frictions happen from people with different perspectives.

16:19Paul Rhode:That's Paul Rohde. He's an economic historian at the University of Michigan. But back in the early 2000s, he worked down the hall from Coleman at the University of North Carolina.

16:30Koleman Strumpf:I happened to be reading some microfilm at the library and came across news stories in October, November 1924 about election markets. So I go up to Coleman Strunk to his office and say, hey, did you know these happened? And he wasn't aware that they happened. So it was an interesting surprise for both of us.

16:55Paul Rhode:Paul and Coleman started digging into the archives in earnest. And it turns out, pretty much as long as there have been elections, people have been betting on them.

17:04Robin Hanson:Back to the 16th century. There's betting on who would become the pope. Elections in city-states, in Venice and Genoa. And in the U.S. You can, like, find markets going back to George Washington.

17:16Koleman Strumpf:How long the Stamp Act would be in place before the American Revolution.

17:22Paul Rhode:Paul and Coleman say for centuries, these markets stayed relatively small. There wasn't a ton of money on the line. Sometimes the bets didn't involve money at all.

17:32Robin Hanson:If the candidate I support doesn't win, I'm going to cut my beard. Or I'm going to walk from New York to Boston.

17:39Koleman Strumpf:Or you have to eat a crow if I'm right. You have to push me in a wheelbarrow down Main Street.

17:45Paul Rhode:But around the turn of the 20th century, election markets in the United States really started to gain steam.

17:51Robin Hanson:The main place that people would trade on elections was something called the Curb Exchange, which literally, as the name suggests, was the curb outside the New York Stock Exchange.

18:02Koleman Strumpf:They'd be sitting on the curb and they'd be trading stocks and signaling to people in the offices about them.

18:09Paul Rhode:Stocks, to be clear, in political candidates. People running for office.

18:15Robin Hanson:Reporters for the Wall Street Journal and New York Times could go down to this pit and not only tell us what the overall price was, but the names of the people trading. And if you look, the people were trading. These were like the elite of the city. These were people from Tammany Hall. These were bankers, Wall Street folks, people owned hotels.

18:34Koleman Strumpf:People would be doing this very publicly. So if you were like the head of the Republican Party or you're the head of the New York Tanya Hall, you'd be expected to go to the betting commissioner and be willing to offer money for your candidate. So it would be part of the publicity about you're standing behind this person. You think they have a good shot of winning.

18:57Paul Rhode:Were you expected to bet on your own candidate or could you bet against your candidate if you thought your candidate wasn't going to win?

19:04Koleman Strumpf:So we knew that like William Jennings Bryant, the populist from Nebraska, was not popular with the workers in New York. The Democratic machine in New York has to like bet for him. But then the stories are behind the scenes, they're placing bets the other way so that they cancel out.

19:23Paul Rhode:Because they don't want to lose money. Like publicly, they'll say, we love him, we endorse him, but they don't want to lose their money in the market.

19:29Koleman Strumpf:Yeah. So they're going to be like hedging or going against their candidates.

19:34Paul Rhode:All of this was happening in a sort of legal gray area. Making a friendly bet on the outcome of an election wasn't against the law. But if you did that, you weren't supposed to vote.

19:44Koleman Strumpf:But I don't think anybody ever said, we're turning you away from the polls because we know that you bet on elections.

19:52Paul Rhode:Were these prediction markets, as far as you can tell, good at predicting the outcomes of elections and whatever else was being bet on?

20:02Robin Hanson:So this was like the second thing that I was wrong about. My sense was, okay, the markets will do as well as they can, but there's not much information to be had. These markets won't really tell us anything. Well, that I was definitely wrong on. And they were always right, basically. They would tell us who would win. They could give you a sense of whether there'd be a landslide. It was really pretty remarkable.

20:26Paul Rhode:You kind of pointed out that late 19th century to World War II era as this kind of golden age almost of prediction markets. Why did they fall off after that for a while?

20:38Robin Hanson:It's a combination of factors. One of the things that both drove the popularity of the markets as well as the discussion of the markets was the press coverage. Through this period, all the newspapers covered it, but they were never very comfortable doing this. Then in the 1930s, that's when the scientific polls, Gallup and some other folks came around. And so the polls were doing something that was kind of the same thing. And newspapers were much more comfortable writing about polls than they were with markets. The other thing in some sense has to do with interest of the people trading. So if you're somebody who really likes this for whatever reason, you like to be known as a good forecaster, you like to make money, you like the adrenaline rush, any of these factors.

21:23Robin Hanson:The problem with elections, or at least I'll just say U.S. elections, is we don't have enough of them. This is around the time when thoroughbred racing started to really take off. And so instead of a couple events a year, you could have 12 races a night. And I think for people who were interested in that, I think the horse track was more attractive as a thing to do. And I think some of the interest among traders kind of dissipated at that time.

21:49Paul Rhode:As far as Coleman and Paul can tell, presidential election markets went dark sometime in the 1940s. And then for the next four decades, radio silence.

22:01Robin Hanson:I have never found one person who could have been around during that period, or even books that talk about elections during that period, that mention these markets. This was not some small, tiny thing. I don't know how they've managed to slip through the cracks of what's known about that time, but they seemingly did.

22:23Paul Rhode:Until 1988, when three professors in Iowa went for a three-beer lunch. And the Iowa electronic markets catapulted prediction markets back into the public consciousness as an alternative to political polls. Here's Robert Forsyth again, one of the founders of the Iowa electronic markets.

22:42Koleman Strumpf:Once we went nationally, two things happened. We would get phone calls from traders around the country, not realizing we had a$500 limit and wanting to send us a check for several hundred thousand dollars to invest in the market. And we'd have to say, well, gee, that'd be great, but we only can take$500 of your money. But we got to realize that many of these people weren't speculators. These were people that were involved and were trying to hedge some political risks that would affect their company or their operations.

23:11Paul Rhode:Say you're worried a certain candidate might win and pass laws that will hurt your business. You can hedge your bets. Put some money on the person you do not want to win. If they win, you cover your losses.

23:23Koleman Strumpf:So that was the one kind of phone call. And then we would occasionally get a phone call saying, this is great, but you have to stay small. We stayed in the United States. Why don't you come with us and come over to the Cayman Islands? And we operated there. And you could run without restriction. and maybe we should have done that. I don't know. At the point in time, we were a bunch of academics who were mainly concerned with our teaching and our research. And so we turned those opportunities down.

23:52Paul Rhode:Looking back on it now, why do you say, well, maybe we should have done that?

23:57Koleman Strumpf:Well, you know, there are days that I'm sort of jealous of Kalshi and the Pali market. I mean, they've really taken the same idea. I mean, they're running basically the same prediction markets we did went on a much bigger scale. In fact, they basically use the same rules for trading and issuing contracts that we used back in 1988. But they certainly have expanded it vastly. And so you can just about trade on anything there.

24:22Paul Rhode:The Iowa electronic market established something important. It demonstrated to modern economists that prediction markets worked. And that sparked a chain reaction, says economist Coleman Strumpf.

24:36Robin Hanson:once we see, oh, look, these markets kind of work in the modern period, could we use these markets to forecast other things? So could we look at other elections? Could we look at current events? And I think it kind of showed to the world that these things could work, but maybe it was only in this one specific domain. And we didn't yet know, would that same kind of forecasting savvy translate into other situations. So that was for other markets to help point out.

25:10Paul Rhode:Coming up, another economist gets close to answering that question. But then his experiment goes off the rails.

25:19Robin Hanson:They called it terrorism futures, I think. Well, the accusation was we were having markets betting on death.

25:29Koleman Strumpf:Hi, I'm Angel from Paonia, Colorado. And I listen to ThruLine from NPR when I'm painting houses and it makes it feel like I'm not even working at all.

25:38Robin Hanson:This message comes from Capella University. You know that feeling when there's a spark building inside you, that you were meant for more? That's your own drive pushing you towards what's next. Capella University gets that. With their FlexPath learning format, you can set the pace and earn your degree without putting life on pause. You've built experience and know what you're capable of. Now, this is your time to turn that momentum into more. The only real question is, what can't you do? Learn more at capella.edu. This message comes from the Arbor Day Foundation. For more than half a century, the Arbor Day Foundation and its global network of more than a million inspired individuals, businesses, and community leaders have united behind the power of trees to help solve some of the planet's most pressing problems.

26:30Robin Hanson:From Michigan to Madagascar, the Arbor Day Foundation is planting trees at the speed of a changing world in communities and forests across the globe. See how you can do your part at arborday.org slash NPR. This message comes from our NPR sponsor, Fort Myers, Islands, Beaches, and Neighborhoods. This summer, follow what feels right, like embracing your playful side on Fort Myers' white sand beaches. Direct flights arrive daily. Plan your trip at visitfortmyers.com.

27:02Koleman Strumpf:This message comes from Mercy Corps. Around the world, Mercy Corps is delivering life-saving aid and staying alongside communities, helping families recover, rebuild, and find hope. Visit mercycorps.org slash donate to build a stronger tomorrow. Part 2.

27:20Paul Rhode:The Assassination and Terrorism Market In the early 1990s, Robin Hanson was a young programmer and, his words, amateur economist. He dropped out of grad school to move to Silicon Valley, where he worked two jobs, one during the day and one at night. Not because he had to, but because he was that excited. All around him, he saw an artificial intelligence revolution unfolding.

27:51Robin Hanson:I was hanging out with futurists and science fiction fans who generally had a very ambitious vision of the future of how technology could do lots of things. So, for example, some of the people I was hanging out with eventually, I think, became the Bitcoin founders. Other people were doing a thing called nanotechnology, which was a futuristic image of fine, detailed assembly of atoms. Other people were into space. I was in a world, all of which were trying to make the future and make it big and grand and different. And we were pursuing different technologies for it. But we all had this idea that what you wanted to do was to be part of a project that was trying to change the world in a big way.

28:31Paul Rhode:Robin had moved to Silicon Valley in part to join the race to build a World Wide Web. He got a job in the AI Center of Lockheed Martin, an American global security company that's one of the biggest defense contractors for the U.S. government. And later, he consulted at Xanadu, an early internet network pioneer. But more than anything, Robin wanted to change the way we think. He was interested in information, how people get it, how they use it to make decisions. And he was frustrated because the world as he saw it was inundated with bad information.

29:08Robin Hanson:If you think about the topics in the news or pundit commentary or politician stances, those sort of topics, we were thinking that the world just doesn't do very well. People say stupid things, other people believe them, and we don't actually figure out the truth very well. So I thought if we had betting markets on these topics, then that could be a healthier consensus that we could use to decide what we all believe. And in those sort of grand ambitious terms, I started to think and write about how far could we go with using betting markets on many different topics?

29:46Paul Rhode:Robin and one of his buddies created board games where players would bet on the outcome of a murder mystery. He built what he thinks might have been the first web-based markets where people could trade on scientific questions and policy decisions. And Robin also created a corporate prediction market within Xanadu to help the company navigate technological changes and forecast deadlines. It was an intellectual exercise.

30:12Robin Hanson:It's an attempt to change the world by demonstrating concepts and showing things that could happen. But again, this...

30:18Paul Rhode:It wasn't a get-rich-quick scheme is, I guess, what I'm trying to get at. You weren't trying to line your pockets. You were trying to really prove this idea.

30:25Robin Hanson:I don't mind people getting rich from improving the world. I'm an economics professor, so that's not a problem for me. But I was focused on trying to think through the issues and make demonstration projects to show people what could work.

30:39Paul Rhode:Robin was imagining a system of what he called idea futures. His vision was, instead of having disagreement over decisions, what if we had a model that could process lots of data, lots of different points of view, and spit out the best possible answer? A market, he thought, could fundamentally change how people shared ideas. Eventually, Robin started to feel stunted in the corporate world. So he went back to academia. And that's where, around the year 2000, he got a call from DARPA. That's the U.S. Defense Advanced Research Projects Agency.

31:18Robin Hanson:DARPA, which is a blue-sky research arm of the Defense Department, it had heard about prediction markets or betting markets, and it said, gee, maybe this is something we want to look at. And it set up a proposal to say, show us that this could work for our stuff. Show us that betting markets could do something the Department of Defense would find interesting. And the person who ran that came to me personally to make sure I knew about this because he had read about me and he saw that I was a person known in this space.

31:47Paul Rhode:Getting this kind of a request from DARPA, what was your first thought of potentially working with the government and with defense specifically? And were you surprised that they would have an interest in incorporating prediction markets in some form into their strategy.

32:05Robin Hanson:Look, maybe I should have, but come on, I was a young and, you know, grandiose, ambitious guy, and this was my grand vision, and somebody was finally wanting to pursue the vision, and I was very open to that. So I was not overly surprised that the world was catching on to my ideas.

32:21Paul Rhode:Robin started working on a new, more sophisticated kind of prediction market. Instead of just betting on a single issue or question, traders in Robin's new market would be able to bet on combinations of related questions.

32:35Robin Hanson:We said, well, what would we apply that to? So we thought, well, let's take geopolitical events in the Middle East as the forum for our predictions.

32:45Paul Rhode:So for example, he might ask, do you think the Saudi regime will fall in the next six months? And next question, if it does, how do you think that will affect the price of oil? Here's Robin reading directly from the project proposal.

32:59Robin Hanson:So it said we plan to cover eight nations. For each nation in each quarter of a year, we plan to have traders predict military activity, political instability, economic growth, U.S. military activity, and U.S. financial involvement.

33:13Paul Rhode:Robin and his team got the green light from the Department of Defense shortly after September 11, 2001. The project wasn't a direct response to 9-11. But as the U.S. ramped up its war on terrorism, the work Robin was doing took on a new context. The team decided to call its project the Policy Analysis Market. It was set to launch in summer of 2003. And when it did, members of the public would be invited to trade on it. Each person could invest a maximum of$100. The policy analysis market did not have permission from the CFTC to do this, but it didn't need approval because it was an agent of the U.S.

33:53Paul Rhode:government.

33:54Robin Hanson:And then we made a call for proposals for testers. We said, who wants to come be early users of this website, and we will pay you to sort of test it out and help us work it out until it's ready for the big leaks. We made a public website where we showed the idea and a sample screen of what the thing might look like. And then we said, please come join our project.

34:19Paul Rhode:That sample screen showed the sample markets organized in buckets by topic. So there was a section for military activity, one for economic growth, and so on. But there was an extra section, miscellaneous, for bets that didn't fall neatly under any of the other categories.

34:36Robin Hanson:And I think in the sample, miscellaneous section had two miscellaneous events. One was, what if North Korea sent off a missile somewhere? And another was, what if Arafat, who at the time was an important politician, was assassinated? How would that change events?

34:50Paul Rhode:Yassid Arafat wasn't just an important politician. He was the longtime leader of the Palestine Liberation Organization and president of the Palestinian Authority, placing him at the center of one of the most protracted and high-stakes conflicts in the world.

35:06Robin Hanson:Things that we thought might be relevant for the events we were talking about.

35:09Paul Rhode:I mean, that's going to attract controversy, right?

35:11Robin Hanson:Well, this was the Middle East. I mean, we were doing eight nations in the Middle East, which was going to include Israel.

35:16Paul Rhode:Yeah, which eight nations?

35:18Robin Hanson:Israel and Egypt and, you know, Syria and Iraq, etc. Those would be part of the mix.

35:24Paul Rhode:The website went live. Online registration for the policy analysis market was scheduled to go public on August 1, 2003. But it never got that far.

35:35Robin Hanson:Ladies and gentlemen, first of all, thanks for being here. On a Monday morning, a very particular Monday morning, July 28, 2003, two senators had a press conference. We have discovered something that is going on at the Department of Defense, a relatively small program run by Admiral Coindexter that is almost unbelievable. And they called attention to our project in their press conference and said, this is terrible. In fact, when you describe it to people, they say, well, this can't be the truth. I mean, obviously this can't be going on.

36:06Paul Rhode:The senator compares the policy analysis market to a headline in The Onion. You can hear laughs in the background.

36:15Koleman Strumpf:The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it's grotesque.

36:24Robin Hanson:And they called it betting on terrorist attacks. They said we were going to have betting markets on terrorist attacks and this was a terrible thing to do. But clearly this is morally wrong. I think this is unbelievably stupid. And a lot of pundits and people talk to each other. And so much media stuff happened that by the very next morning, the Secretary of Defense in front of Congress said this project's dead. Within 24 hours.

36:50Paul Rhode:Wow.

36:51Robin Hanson:And in that 24 hours, nobody asked us if the accusations were correct.

36:55Paul Rhode:What was the nature of the accusations?

36:58Robin Hanson:Well, the accusation was we were having marks betting on death. And that was the very idea of betting on death was bad. There was also two other kinds of complaints people had about things they thought might go wrong, but that was the most direct presenting complaint. It's just bad to bet on death.

37:15Paul Rhode:Is that how you saw it? Like, on some level, isn't it betting on death?

37:20Robin Hanson:I mean, yes. The whole point is, if we're giving the Defense Department advice about the Middle East, about military stuff, yeah, deaths are going to be involved somewhere in the Defense Department's events in the Middle East, right? Death is likely to be involved in those consequences.

37:36Paul Rhode:When Robin looked at the policy analysis market, he saw the potential good it could do. He believed it might encourage world leaders to think twice before starting short-sighted wars. It might help prevent terrorist attacks by predicting when and where they could happen. The public saw it differently.

37:55Robin Hanson:If this is how we're going to find out about terrorism, we don't want it. Let's not do this thing to find out about terrorism. That's just going too far was, I guess, the statement.

38:04Paul Rhode:It was seen as going too far. Why? Why do you think in that moment it was seen as going too far?

38:11Robin Hanson:I'm an economist. And so all my life, I have faced the facts that many people have, you might say, hangups or reservations about money. There are many just rules people have about where money should or shouldn't be involved in the world. And that's often a bit puzzling to we economists because we see how powerful money can be and all the great things it can do. And this just seems to be a rule people have in their head, no betting on death. A rationale for that could be that if you bet on death, you could create incentives to cause deaths. But that wasn't very plausible in this context. These are going to be small markets without much money at stake.

38:46Robin Hanson:So nobody's going to go kill anybody for$30. I mean, I was hoping, of course, that in the future there'd be bigger markets, et cetera. But being concerned that this particular market would cause people to do harm to make some money, it didn't make much sense because of the small stakes involved.

39:01Paul Rhode:It's understandable that on a kind of psychological or just sort of that feeling of like ickiness, right? That people feel discomfort.

39:11Robin Hanson:That's one of these things. We kind of see this ickiness thing all the time when we go, why, why, why is this icky? But yes, people have ickiness.

39:16Paul Rhode:So you don't see it at all.

39:17Robin Hanson:Which is like, look, if you see a room in surgery and you see them cutting open with a scalpel, it's just icky, right? But you go, I need to suppress that reaction because I do think surgery is legitimate. And I don't want to yell and make them all stop the surgery just because I'm having an icky reaction to seeing somebody get cut with a knife, right? I've learned that I have all sorts of maybe immediate reactions that I need to hold back and to restrain because first I need to think about, does the reaction make sense and is it appropriate?

39:50Koleman Strumpf:Tom, that last idea to create a futures market on terrorist incidents was about as badly received on Capitol Hill as anything I can remember.

39:58Robin Hanson:Democrats said that market could actually give terrorist groups a way to profit from attacks they carry out,

40:04Koleman Strumpf:and some Republican leaders made it clear right from the start that not only would the program have to be canceled, they wanted someone to take responsibility for it, which was taken to mean at least one head would probably have to roll.

40:17Paul Rhode:On July 29, 2003, just 24 hours after the media firestorm ignited, the policy analysis market went dark. The head of DARPA resigned. And the promise Robin Hanson had seen in the growing world of prediction markets came to a screeching halt. But prediction markets were not gone forever. Outside DARPA, outside universities, a seed had been planted and started to take root. Private industry was poised to capitalize on these theoretical ideas to make very real money.

40:53Koleman Strumpf:Hello and welcome. My name is John Delaney and I'm the CEO of InTrade. Let me tell you a little about what we do.

41:01Paul Rhode:That's coming up.

41:05Robin Hanson:This is Jacob in Irvine, California, and you're listening to ThruLine from NPR.

41:12Koleman Strumpf:I really love the show, y 'all. A key factor getting me through grad school, I listen to it when I'm working in the lab, helps keep my mind focused while I'm doing science. So thanks for all your hard work and really appreciate the way you tell stories. Bye-bye.

41:30Robin Hanson:This message comes from Capella University. You know that feeling when there's a spark building inside you, that you were meant for more? That's your own drive pushing you towards what's next. Capella University gets that. With their FlexPath learning format, you can set the pace and earn your degree without putting life on pause. You've built experience and know what you're capable of. Now, this is your time to turn that momentum into more. The only real question is, what can't you do? Learn more at capella.edu. This message comes from the Arbor Day Foundation. For more than half a century, the Arbor Day Foundation and its global network of more than a million inspired individuals, businesses, and community leaders have united behind the power of trees to help solve some of the planet's most pressing problems.

42:22Robin Hanson:From Michigan to Madagascar, the Arbor Day Foundation is planting trees at the speed of a changing world in communities and forests across the globe. See how you can do your part at arborday.org slash NPR. This message comes from our NPR sponsor, Fort Myers, Islands, Beaches, and Neighborhoods. This summer, follow what feels right, like embracing your playful side on Fort Myers white sand beaches. Direct flights arrive daily. Plan your trip at visitfortmyers.com.

42:54Koleman Strumpf:This message comes from Mercy Corps, helping families persevere through crisis, hunger, and natural disaster, and equipping vulnerable communities so they can adapt and thrive. Your support helps deliver life-changing support in over 35 countries. Visit mercycorps.org slash donate to build a stronger tomorrow. Part 3.

43:18Paul Rhode:The World Becomes a Casino Prediction markets are growing. Fast. Since the beginning of this year, users on Polymarket and Calci traded more than$60 billion on both platforms. That's already more than in all of 2025. Unlike the Iowa electronic markets and DARPA's policy analysis market, Polymarket and Calci are for-profit entities. They make money on every transaction. But they're not the first companies to try and take prediction markets commercial.

43:52Robin Hanson:Around 2000, two markets arose.

43:55Paul Rhode:This is our prediction markets guide and historian, economist Coleman Strumpf.

44:00Robin Hanson:One was called InTrade, which was an Irish site, but mainly oriented towards people in the United States. And the second was a site called Betfair, which was a U.K. site. And it was mostly oriented to people in Britain.

44:16Paul Rhode:It's not a coincidence that both in-trade and Betfair were based overseas. As the professors at the University of Iowa found out in the late 1980s, you need permission from the federal government to run a futures market in the United States. And so far, the U.S. government had only given its blessing to one such market, the Iowa electronic market. So even though in-trade's founders were both from New York, they moved their company offshore to Ireland. But Americans still use the site. And when they started wagering money on U.S. elections, the media took notice.

44:53Koleman Strumpf:Wouldn't you like to predict the future? Like, who will be the next president? I do. Senator Barack Obama of Illinois be selected by this.

45:01Robin Hanson:Well, there's a website that makes more accurate predictions than any I've ever come across. You can bet not just on candidates, but on everything from box office receipts to the weather. And this is real money.

45:13Koleman Strumpf:When I found out that we could actually trade on politics, it was like, what? Why have we been investing in stocks all along? Intrade.com lets people bet on the future. When you trade on Intrade, you put your money where your mind is.

45:27Paul Rhode:Both Intrade and Betfair were growing around the same time that Robin Hanson was helping to develop the policy analysis market at DARPA. And in 2003, just a few months after the federal government pulled the plug on the policy analysis market, InTrade made its own headlines.

45:44Koleman Strumpf:It's been a dramatic and historic day in Iraq.

45:47Paul Rhode:There was a market open on InTrade about whether Saddam Hussein would be, quote, captured or neutralized before the end of 2003. In the fall, there wasn't much to report. It didn't look like the U.S. military had any particularly good leads. But then, in early December, trade saying Hussein would be found spiked. And just a couple days later...

46:10Koleman Strumpf:Saddam Hussein was captured Saturday, December 13th at about 8.30 p.m. local.

46:15Paul Rhode:The next year, in 2004, in-trade made headlines again, this time for very accurately predicting the results of the Bush v. Kerry presidential election. That media coverage triggered a bump in in-trade's American users.

46:29Robin Hanson:The market was going well aside from the fact that it was not located in the United States, and the CFTC was furious about this.

46:38Paul Rhode:The Commodity Futures Trading Commission, which regulates futures markets in the U.S., went after both in-trade and its counterpart, the British site Betfair.

46:49Robin Hanson:Betfair pretty much said, OK, I understand. Even though we are not a U.S. company, we will basically set up a wall that will make it harder and harder for people in the U.S. to trade on the site. And in fact, today, Betfair still exists. If you go to the site from the United States, you won't even be able to access it.

47:07Paul Rhode:But Intrade and its CEO wouldn't play ball. So between 2005 and 2013, the CFTC came back over and over again. First with a cease and desist and fines. Because Intrade allowed its users to trade on commodities that didn't have legal markets in the U.S., like crude oil and gold futures. Then Congress passed legislation cracking down on online gambling. Intrade saw a big drop in users. And finally, in 2013, the CFTC came back to hammer in the final nail in Intrade's coffin. A lawsuit.

47:46Robin Hanson:They were perpetually trying to get Intrade shut down.

47:50Koleman Strumpf:This week, the website Intrade, based in Ireland, said all American users must shut down their accounts by the end of the year.

47:58Robin Hanson:Little is known about what happened to Intrade. A statement on its website says it stopped trading due to, quote, circumstances recently uncovered.

48:07Paul Rhode:I think everyone's surprised.

48:08Robin Hanson:The biggest part of the surprise is we don't yet know why it is that in-trade is shut down. Eventually, a series of things happened at in-trade that led to the company's demise. The CEO died climbing Mount Everest, and that was a big issue. And then it also turned out that the company was not following standard accounting practices for keeping the money available for people who wanted to cash out. And when that became public, that was kind of the beginning of the end of this company.

48:40Paul Rhode:But the CFTC did not stop going after in-trade, even after the company had gone out of business.

48:46Robin Hanson:Spring of 2013, in-trade is basically non-existent. The CFTC fined Intrade, a company that basically doesn't exist anymore, a few million dollars. There's an expression apparently in the financial world called finding a corpse. So Intrade being the financial corpse in this case. And I guess the idea is to just say, look, if somebody else tries to do what Intrade did, we're going to come after you.

49:12Paul Rhode:They're sending a message.

49:14Robin Hanson:Exactly, 100%. And so clearly around, you know, through 2013, the federal regulatory agency in the U.S. is in no way interested in having these markets.

49:25Paul Rhode:That isn't to say no one tried. A few other election markets made a go of it in the U.S. over the course of the 2010s. Sports gambling became legal in some states during this time. But on the whole, the federal government kept a very tight leash on those markets. And that includes Calci and Polymarket, the two prediction markets that are in the news right now. Both sides gained steam around the 2024 presidential election. Calci ran legally under the watchful eye of the CFTC. But Polymarket did not get that same go-ahead and was completely banned by the U.S. government in 2022 for failing to comply with federal regulations.

50:06Paul Rhode:All this until last year, when President Trump appointed a new chair to the CFTC, a guy named Michael Selig. He was chief counsel of the crypto task force at the Securities and Exchange Commission.

50:20Robin Hanson:And he is very, very favorably inclined to prediction markets. And it is a diametric opposite of anything I'd ever seen in my 30 years of looking at prediction markets. So he is very much on the side of all the prediction markets. And as of now, in 2026, this is a very favorable space for prediction markets.

50:42Paul Rhode:But others say there are real concerns about how prediction markets are being used. For example, the New York Times recently did a close examination of polymarket users. It identified some 11 ,000 accounts that raised, quote, warning signs. That included successful long-shot bets, extremely well-timed wagers by new accounts, and bettors who gambled on a specific topic without ever losing. A lot of these users focused on military operations. So there's reason to believe the traders may have been people who work for the U.S. military or the government. Paul Rohde, Coleman-Strum's former colleague, has been following prediction markets for decades.

51:24Paul Rhode:And he says this ethical question is one he thinks about not just in terms of what's happening with prediction markets now, but where they're likely to go in the future.

51:35Koleman Strumpf:The logic of your betting on whether somebody's assassinated, that's really ugly. The idea that you're profiting from somebody else's misfortune, that arises disgust. that arises this kind of reaction that you can help somebody out in their time of trouble, but you should not be gaining from their time of trouble, their misfortune, and betting on in favor of or that you believe somebody's going to be assassinated or you have private information that they're going to be assassinated. There is a disgust reaction to that. It seems really dark and really immoral.

52:23Paul Rhode:Back in 2003, the economist Robin Hansen looked on as that feeling of disgust swallowed up his DARPA project, the policy analysis market. But watching what's happening with prediction markets today, he says he's excited. He hopes this is just the beginning of a future where prediction markets are a much bigger part of our lives.

52:45Robin Hanson:For example, we could have a market for each company in, if you keep the CEO, what's the stock price? And if you get rid of the CEO, what's the stock price? We could have markets for students about what schools to go to or what majors to take. You could have markets to individuals about if you dated somebody, how long would the relationship last? You could have it about whether to change government policies in an area. Calcium Polymarket blowing up have now enabled other people to be more comfortable with trying the things that I think is the most promising.

53:12Paul Rhode:You sound so optimistic. And then there's this part of me that's like, do I want to calculate every decision I ever make? Like, it gives me anxiety.

53:20Robin Hanson:Many people do feel this awkwardness about money being involved, things in numbers. And we're getting both of them here. We are somewhat uncomfortable with the idea that we replace personal relationships and personal habits with structured systems. But over centuries, we've made enormous changes in what systems we are comfortable with and that we have around us. And if at one time something was too early, later on it might no longer be too early and people might be ready to accept it. So that's a question about prediction markets now. Are we ready to accept them now? I hope. Another possibility is some combination of social backlash, regulatory backlash, a change in administration in the White House and or Congress.

54:03Robin Hanson:And these things are prohibited. And then they go to zero.

54:06Paul Rhode:— Coleman Strumpf went from watching horse racing as a kid to studying prediction markets and says economists have almost always felt more optimistic about prediction markets than regular Americans. Every time these markets make a comeback, economists want to believe they're back for good. But as long as Coleman's been studying this history, he says that's never been the case. It's a repeating cycle, a boom in popularity followed by a crash out. because the more money and power prediction markets hold, the more controversy they attract. Are you surprised at how far we have come in the last, you know, 30 years from those three professors walking into a bar in Iowa to now people betting on pretty much everything, right?

54:56Robin Hanson:I'm as mystified as anyone who's going to be listening to this show. I'm as surprised at where we are in 2026 as anyone else. If you had asked me in 2023, would we be here? I would have been nowhere close to this.

55:14Paul Rhode:As far as what might happen next, Coleman says he's glad he doesn't have to put money on it.

55:32Paul Rhode:And that's it for this week's show. I'm Randa Dilfetat. ThruLine was created by me and Ramtin Adablui. This episode was produced by me and... Sarah Wyman. Julia Redpath. Casey Miner. Christina Kim.

55:47Koleman Strumpf:Devin Kadiyama.

55:48Paul Rhode:Kiana Mokadens. Irene Noguchi. Julie Kane. Thank you to David Bieri, Brett Neely, Johannes Durge, Dylan Kurtz, Rebecca Farrar, Yolanda Sanguene, and Tommy Evans. And shout out to Michael Strumpf. Fact-checking for this episode was done by Kevin Vocal. This episode was mixed by Maggie Luthar. Music for this episode was composed by Ramtin and his band Drop Electric, which includes...

56:14Koleman Strumpf:Naveed Marvi. Sho Fujiwara.

56:17Paul Rhode:Anya Mizani. And finally, if you have an idea or liked something you heard on the show, please write us at throughline at npr.org. And if you're open to us giving you a call back, leave your number too. We might feature your idea in an upcoming episode. Also, make sure to follow us on Apple, Spotify, or the NPR app. That way, you'll never miss an episode. Thanks for listening.

56:46Koleman Strumpf:This message comes from Mercy Corps. Around the world, Mercy Corps is delivering life-saving aid and staying alongside communities, helping families recover, rebuild, and find hope. Visit mercycorps.org slash donate to build a stronger tomorrow. This message comes from Bombas. Your feet hit the ground an average of 2 ,000 times in a mile. Bombas sports socks are designed to support you every step. Sprint to bombas.com slash NPR and use code NPR for 20 % off your first purchase.

57:18Paul Rhode:We flush a lot of things down the toilet.

57:21Koleman Strumpf:You know, the obvious ones. But drugs like cocaine are also going down the drain and into our waterways. That's changing the animals that live in it.

57:29Robin Hanson:It's definitely present in most ecosystems on Earth now, unfortunately. We're only sort of really starting to scratch the surface into understanding the potential consequences of that.

57:37Paul Rhode:Forget cocaine bear. Learn about cocaine salmon on Shortwave, in the NPR app, or wherever you get your podcasts.