Prediction Markets Are Not Investing

Betting has gone mainstream, and now it’s wearing an “investing” costume. We take a skeptical look at prediction markets like Polymarket and Kalshi and ask what they really are: useful information tools, entertainment, or a fast track to bad financial habits. The moment you put real money on a short-horizon yes or no outcome, you’re not valuing a business or building a portfolio, you’re buying exposure to uncertainty. 

We also connect the prediction-market boom to the bigger trend we see in public markets: massive growth in options trading and the normalization of ultra-short-dated contracts. Leverage amplifies outcomes, but it also amplifies volatility and regret. We talk about the simplest dividing line we know between investing vs speculation: time frame. If you’re operating in days, you may be doing something that feels analytical while behaving like a coin flip. 

From there, we dig into the harder questions: does the wisdom of crowds actually show up in these markets, or do whale bets and low liquidity distort the “probabilities”? What happens when insider information leaks into a contract, and how mature is regulation and enforcement? We even explore why national security events and influence operations make prediction markets uniquely messy, and why we don’t love seeing financial media treat these odds like they carry the same credibility as traditional, regulated signals. 

If you’re curious about prediction markets, sports betting, options trading, and risk management, this conversation will help you set guardrails and keep your long-term plan intact. Subscribe, share the episode with a friend who’s tempted by “easy odds,” and leave a review with your take: are prediction markets signal, noise, or both?

Straight Talk for All - Nonsense for None

Please check out our other podcasts:

https://skepticsguidetoinvesting.buzzsprout.com

Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.

Transcript

Online Betting Markets Take Off

Clem Miller 0:02

Hello, everybody, and welcome to Skeptic's Guide to Investing. I'm here with Steve Davenport. This is Clem Miller. Today we're going to be talking about these new electronic online betting markets that we've all heard about. Uh poly markets is one of them, Kalshi is is a second one. Steve, you've been thinking a lot about these and have some thoughts about them. So what why don't you share with us those thoughts?

Steve Davenport 0:34

Well, Clem, it just seems that we're getting into this world that I think it looks and feels a lot more like a blurred line between what's investing and what's speculating and what's speculating in markets versus speculating on teams or on elections or on parties that are gonna be the majority. And it feels to me like we've as a country gone from no, we don't talk about betting or else we're gonna influence the sports, to now we talk about everything, and we don't care who we influence or don't influence. It's , you know, if it's if it's able to be put into a question, it's put into a gaming site, and we we start to to bet on it. And I just think that I don't know, I I think of betting as adding uncertainty, not necessarily reducing it. So let me just tell you why I feel this has gotten out of hand. You know, in the US, our number of contracts traded in options every day is somewhere now between 60 million contracts and 80 million contracts. And that's up, you know, on the last few years of 20 to 30 percent a year. How can we be putting more and more contracts on in these markets?

Options Mania And Leverage Risk

Steve Davenport 2:00

You know, it's it's more leverage, right? If I buy a contract and it's got a leverage of six to ten to one, I'm using more leverage, and therefore, you know, I'm introducing more volatility. And so I thought, okay, let me understand this. You know, we'll go into some shorter term weekly options, and so with the SP, you can get weekly options through every week of the year. I I understand if you have certain events that are occurring and you want to hedge yourself, okay, you know. But then I looked and said, you know, we're talking about almost more than around half of the options today are five-day duration or less. Five days, Clem, you and I can talk about what we think should happen in the next five days, but as the general public, is is that is that a real item that somebody can say, I'm making an investment for five days? Uh first of all, I don't think less than a year is is speculating. So in my mind, when you're looking at things like this, I don't get five days. I don't get especially one day. One day you might as well just say, I'm flipping a coin. And I think the coin comes up 70% positive and 30% negative based on what returns are for short periods of time. But I would say, even, you know, it's it changes somewhat based on the short duration. And I kind of feel that you don't really have much in terms of, you know, everything is in the price. If somebody was going to create a contract that was going to give you money by having a different payout than than was actually to be expected, doesn't arbitrage rules apply and somebody will race to fill that liquidity vacuum and they'll create a contract that's fairer because they know they can get more volume and more more bets. I I look at Vegas and I say, they've been doing this for quite a while. This isn't their first rodeo. Do we think that people who go online and create a contract or do something with an investment is gonna have a better knowledge of how to set the rate and how to set the probability than you know the the entire rooms at Caesars and every other casino? I kind of feel that just like when we look at IPOs, we try to put a price on it that's gonna be fair. And then you try to watch the volume and see where it goes and adjust your odds based on that. I don't think this is where retail investors should be. I don't think this is entertainment when it involves real money, it goes from being entertainment to being something that you should manage in such a way that you're doing the right long-term thing. And I think that's the the work. What separates gambling from polymarkets from investment markets is the time frame. It's the time frame, stupid, and that's what we need to think about. If the time frame is five days or less, you're not in an investment market. If the time frame is, in my mind, less than three months or six months,

The Time Frame Test For Investing

Steve Davenport 5:40

you're not really investing, you're speculating, you're you're looking at something and making a guess. And making guesses when you don't have enough information, I can see why sometimes you have to do it. But should you do it on a regular basis as a way to run your life and try to manage your financial future? I don't think that's the the way to get to the finish line and be a success in your with your mind. What do you think, Clem? Do you think that DraftKings and FanDuel are where you should spread some of your knowledge and experience? I mean, how do you feel about um the Spurs and Wembley? Is he gonna go over 12 and a half rebounds?

Clem Miller 6:30

I think I think it's ridiculous to bet on I've I've always thought that betting is a you know is it basically not investing. It's always a gamble. Um I remember

Casino Rules And Knowing When To Walk

Clem Miller 6:50

back in college I had a um roommate who um whose father was involved in in you know the asphalt business in New York City. And and he and he had tick he had access to the penthouse suite at Ballys Park Place in Atlantic City. And so he would bring up a whole bunch of us to go up there and we would go gambling. And I was a poor college student at the time, and , and even though $40 went a long way, a longer way back then, that's what I would bring. I would bring $40. We would go up in the morning. I remember the there were at that time $2 blackjack tables, and I remember betting for like, you know, gambling for like an hour or two until my money ran out. And then the rest of the day I would spend either watching other people gamble or just like walking along the boardwalk. That was so those that to me, okay. So when I think of gambling, I think of okay, I'm willing to to take a certain amount of money and gamble it. And um, and that's it. I remember, you know, even more recently, my son and I went out on a trip out to um out west, take him to a new job, and we went to Deadwood, South Dakota. Okay. Deadwood's got some casinos there, and we stayed in a hotel that gave you like you know free pass to to you know sort of free money to gamble with. And and I remember taking that to the table and a blackjack table again and betting with that, and I actually I actually won like a hundred dollars or something, and then I just then I just walked. So you have to you have to be willing to map to say I'm only gonna spend this much, and I'm gonna walk if I gain a certain amount of um of winnings. And and that's I always call it putting it in the pocket, yeah.

Steve Davenport 9:08

So I take some and I put it in my back pocket, and I say, okay, you know, now I still have the original 20. I mean, what I remember is that the casinos after a certain time went from ten dollars a table to five dollars a table at one o'clock in the morning, and so we wouldn't be there gambling when it was a ten dollar table, but when it became a five dollar table, we thought it was, you know, and then like to get to the cheapest tables, you have to be there at 3 a.m. You know what I mean? And so it's it's kind of you look around at 3 a.m. and you say, these are the cheapest people in Atlantic City, you know? I mean these are the people who don't have any right being here and pay playing two dollar, you know, three dollar tables. And so I don't know. It's I look at it as entertainment, and and that's the way I think most people should. I don't I don't see it becoming legitimatized because they're gonna put betting kiosks in this different stadiums of the football so you can bet while you're at the game and just I go get a beer and I go get a bet.

Clem Miller 10:16

Well, it's like it's like having you know, being able to bet at the horse races, right? They got the counters there where you can bet on the horses. Uh right.

Steve Davenport 10:26

I think that that's a little different. That's that was designed and created for that.

unknown 10:31

Yeah.

Steve Davenport 10:31

Whereas I think that football games were designed and created to be, you know, to be football. Yeah, to play football into people to be interested because they're local, and yeah, we gotta pay some professionals to play at the highest level. And you know, I I I think that I don't know, it's if if there aren't enough incentives for people to use steroids and to alter themselves and to, you know, have plaglets injected, and all the things they do to get themselves ready. Yeah. And then you kind of look at it and you say, by the way, we're gonna put the pressure of family and friends who are gonna put money on these games and they're gonna, you know, probably influence you to try to. And maybe it's positive, but maybe it's like, hey, um, my ankle's really not right. And you know, and then people will use that information to I I I find the whole thing to be we as a society have enough problems, therefore, to add more to sports, which is supposed to be an outlet for a way to relax, a way to just kind of sit back and enjoy the game. I I think to have to put a bet on it to enjoy it, it kind of it kind of shows me that we're we're missing kind of the purpose of sport.

Clem Miller 11:55

So, Steve, what's your thought about you know moving beyond sports? Yep. Betting on like political events.

Steve Davenport 12:03

Well, I saw like the the probability of Vance um on um on Polymark was 27% for him to be the president inaugurated in 2028. And I thought that

Political Bets And Event Risk Thinking

Steve Davenport 12:19

was an interesting contract, and then I thought, hmm, that contract's probably gonna run a lot a little, right? It's probably gonna run a little hot for him, and then it's probably gonna have some other people who, you know, get added to the mix, whether it's Newsom, whether it's Globushar. I don't I don't know who it's gonna be. But I think that that type of thing to me is is a little more interesting. It's still speculation, and I don't think it's advisable for any kind of other than entertaining value. But I just think that, yeah, some of those things are, and we're trying to figure it out when we talk, right, Clinton? I mean, if we could figure out whether the Iran-Iraq war is on or off in September, October before this midterm, I think we're gonna see how it impacts the price of oil and how it impacts affordability. It's gonna matter for the Trump, you know, White House in order to get support in the House and Senate. So I think there's all of there's a difference though.

Clem Miller 13:24

There's a difference between what we do and thinking about these event risks and what the polymarket Calci betters do. Because what they're doing is it's it's a binary decision, it's a yes or no. And and we don't know, we don't, I mean, we're not making a bet, yes or no.

Steve Davenport 13:49

No, we're saying it nuances or it changes our views and may make us more likely to have energy exposure or to have industrial exposure or to have you know some one of the things that we can use in our portfolio to help express a period where we think energy might still be making a lot of money because this isn't going away quickly. Right.

Clem Miller 14:13

I think that's a really important distinction that we have to make in thinking about this polymarket Calci stuff and and real investing. I mean, real investing, you have to take into account a large number of factors in looking at individual investments. You know, you got to think about valuation and growth and you know, all these different things to figure out what um you know what you should bet in, right? What you should, well, not bet, what you should invest in, right? Uh and it's not it's not just betting on whether there's going to be an invasion or not, right? Um and and what's more is that what's more is that betting on an event like an attack or something like that, a coup, you know, those things to the extent they're already anticipated, , might mean that you're buying too high. And so and so you could actually see you actually lose money if other people had the same opinion that you did prior to the event.

Steve Davenport 15:30

Right. I think I think there's um a whole lot of stuff we can use in discussion, which could say, hey, you know, it says that somebody else besides um Vance is gonna be the next president, 73%. Do you think that's the right number? I I don't know. I I kind of think that he's a front runner, and he should probably be a little higher. So I would say just looking at that bet based on my own impression of the things, right now I'd say that that's and that's what they the people who follow these markets are saying is that there can be these gaps between what people think the probability is and what it is, and when you provide you know some insights, you're basically trying to get it closer to what the real odds are or the real payout is. And I like that kind of analysis because I don't know where to start with. And I think that when there's only a few bets, yes, it's a it's mostly a guess. But once you get a thousand bets or , you know, a certain number of contracts,

Wisdom Of Crowds Versus Whale Money

Steve Davenport 16:40

then I I believe, I guess. Do you believe in the um knowledge of the herd? Do you think the knowledge of the herd really does reflect some real insights, or do you feel like the knowledge of the herd is just a random kind of place they go and they're not, you know, they're not cohesive and they're not thoughtful, and therefore the the herd and what the herd thinks is is going to happen, is it really relevant? I kind of believe the herd is relevant.

Clem Miller 17:08

Yes, I believe the herd is relevant, but I think it's very important to it's very important to be able to look at the information correctly. And I'm not sure that we actually get good information about what the herd really thinks. Let me explain what I mean by that. So right now, when you have these these indications, these probabilities from prop um polymarket, Kelsey, et cetera, , I believe that the more dollars that are at stake, , you know, dollar, it's based on dollars, right? It's not based on individual bets. So if you have these so-called whales out there buying , you know, betting certain ways, those guys influence the market, right? Influence the the probabilities. But that's you know, a whale is like one person, right? And it could be a very wealthy person trying to distort things.

Steve Davenport 18:08

So but but you gotta admit though, Clem, it's usually if they go too far in one way, there's usually somebody out there who says, ooh. Uh maybe. And and I I would say that for every whale on one side of the political aisle, there's another whale on the other side of the political aisle, or in the independent and libertarian aisle.

Clem Miller 18:30

I I don't I don't I don't know about that, right? I don't know about that. Okay. Okay. I I think if you had I think a better system for being able to divine reality from the herd opinion would be to take the median probab the median bet um out of that whole bunch, not the in other words, line them all up and take the middle one, right? Or that kind of thing. Some something that that more equalizes the votes across across those who are betting and not something that's weighted really heavily towards the the folks who are betting the most money. So I mean if you I'm not saying I'm not talking about systems for betting. I'm talking about how to divine a probability from a market bet, right? And I'm saying that it should be based more, you know, opinion of the herd should be about the herd. It shouldn't be about like the top dogs in the herd.

Steve Davenport 19:33

I understand that the volumes can be lower and there can be a couple of big bets, and that makes that much harder to discern any real information. What I was talking about is I've got 20,000 bets. There isn't a big outlier, or we take out the outlier, and then we look for a median in the end. I think there's ways to analyze the data to make it more likely that you can pull true insight. And I think that it's five bets, or there's four large bets and a thousand small ones, that we we have a problem with um, you know, being overly influenced by one or two opinions. I agree with you there, but I'm just saying in general, do you think that if you get enough people, say 10,000, 20,000, some number that's significant, and you say, hmm, I don't see any raw data here that says that this is being influenced by a I look at this and I say, this probably represents what I think is, you know, true. If this is a you know a congressional election in in you know in Minnesota, it's it's gonna have this type of feedback. And I I look at that and say, you know, it's another piece of information for us as investors. I'm not sure it's another field we should be calling investment in. I I just think it's a field that you say it's interesting, it's curious, um, but is it is it significant? Like, are you gonna suddenly incorporate it into your process that hey, you know, this name keeps coming up on these bulletin boards, that tells me there's gonna be more smart money or less smart money. Well, until the and then if you say, hey, there's less smart money here, maybe that's where I focus my efforts, right?

Clem Miller 21:30

I just don't think I don't think the size of the bets is necessarily correlated with the smartness of the money, right? I think it could be political distortion of markets.

Steve Davenport 21:43

Um I would say that I would if if you thought that, then there's gonna be a people who are gonna be sticking their neck out with cash. And if you wanted to be on the other side of that, that's to me if the money. Doesn't have a little bit of smarts to it, it's the market is going to pick them off.

Clem Miller 22:05

Well, I'm not so sure about that. Okay. We may we may disagree on this because let's say you've got this big whale coming in that's trying purposefully trying to distort the market, right? But it comes in, then other people in the market who have the money to to play on that, to take the other side, are going to look at that and say, well, you know, I I don't agree with that. I'd love to take the other side of that, but maybe this guy has inside information that I don't have. And so I'm not going to take the bet.

Steve Davenport 22:44

I I think that if you believe there's inside information or it's not a fair market, yeah, you shouldn't be in you shouldn't be in that. And we're beginning to see that now. I think that guy being arrested for that um, you know, $400,000 bet on you know polymarket, you know, the marine guy that was gonna do the invasion

Insider Edges And Regulation Gaps

Steve Davenport 23:05

and he found out when the invasion was and he made a bet on poly market. And so, yes, I think we know that there are people who are gonna try to take advantage of the and I think it's a question of I mean, do we know? Like, are is the polymarket, you know, like the crypto market, mature enough to say, hey, there's there's law enforcement, there's clear regulation, there's clear ideas about what's manipulating the market and what's not. I I I have a feeling that the crypto market and this polymarket are probably a little bit new and that they're probably not as clear on the definitions of what's appropriate and what's I think I think they're both they're both dangerous.

Clem Miller 23:50

I mean, let's let's look at let's look at um these polymarket bets when it comes to national security issues, right? If this were, you know, if the Chinese or the Russians, the Iranians, are they looking at the polymarket bets in order to um you know put together a sort of a mosaic of US intentions? I wonder if they're doing that, right? The Chinese, Russians, and and Iranians. And if the US national security people are thinking that this is going on, then why wouldn't the US try to um try to cloak their intentions, U.S. intentions, by you know, betting in the opposite direction on polymarket, , so that the Chinese and the Russians and the Iranians are um you know are more satisfied that nothing's going to happen.

Steve Davenport 24:54

You know, in other words, in other words, maybe in um you want to couch some activity you might want to do with in the opposite way so that the market's not knowing exactly what the US government's gonna do.

Clem Miller 25:09

Right. You could have basically global influence operations to use that term, , or disinformation, driving what's going on in the markets, in these polymarkets in Calci. So that's another reason not to get involved in this because you don't want to be a victim of of influence operations.

Steve Davenport 25:32

Yeah, I think there's a lot of issues around this. And I looked at first one at how does the average investor who's on our podcast, who's trying to figure out whether they should be or shouldn't be doing some of these things as investment. And and I think that you and I agree, and I think most of our listeners would agree, this isn't investing, this is just pure speculation. And I think that as we get closer and closer to sensitive issues that can affect our portfolio, we have to be, you know, thorough about you know, I think that the Fed and interest rates, I think that the budget in Congress, I think the you know, what's happening in the war and and the need for funding and the you know our balance of trade and how the you know how the treasury market's reacting are all going to be better sources of information for us to make a better macro and micro decision. I don't think we're in disagreement on that. I think that where we might differ is hey, can I use that information and say that it's relevant because it's got enough, you know, participants and and that might color how I feel about the end of the Iraq war? I don't know. I think if it were if it were a well, well-balanced bet and it was spread among many people and it had been there for a while, and it said, will the war be over by September 30th? I I kind of would I would be interested in what the percentage was. Yeah, I wouldn't necessarily put a lot of money on that, but I would be more than just curious, I'd be saying, okay, that that's something to consider. I thought it would be over. It's the markets, you know, these polymarkets are saying no. And and that's how I envision it eventually being. But my questions now are: is it regulated? Is it really followed? Are people who are insiders making these bets? And if they are and they have material information, are they being prosecuted or are they being absolved because of the uncertainty around something new? I don't like the idea that somebody is getting away with more information than I have, and therefore it's not a fair market for any of this. I don't spend a lot of money on it, so am I gonna be upset? No, I can't be because I don't have that much vested interest in terms of my own funds. Um, do I like anybody to be on any, you know, CNBC or Bloomberg show showing these numbers for polymarkets and saying, you know, hey, I'm I'm looking at treasuries today, and and also I looked at the polymarket

Media Credibility And Healthy Skepticism

Steve Davenport 28:25

for what crypto will be, you know, at the end of the year. I I don't think that that those are similar events. Therefore, I don't think they should be given the credibility they're given by the media. That's my problem, is when the media gives more credibility to things that haven't justified it with proper regulation and proper, you know, couching of terms, I think they make them seem like they're the same. And when the media does that, it it gives it a gloss of you know um respectability that I don't think it has. I mean, do you think it has respectability in terms of thorough analysis and and and that there's information under underlying these bets?

Clem Miller 29:10

I think I think CNBC is a vehicle where you have a network is that is trying to make money by presenting whatever hot topics or themes are out there that attract eyeballs. And they bring people on the show who are like likewise trying to attract eyeballs and invest or spend or speculate on their products. Uh so there's a a mutuality of interest. So yeah, I would say um, you know, unless you're talking about factual articles, right? Factual articles, that you shouldn't really trust what you see on um, or you know, give it be very mindful of the fact that you know somebody's trying to sell you something. Um when you're telling them to be skeptical. Yeah, just be skeptical. Just be skeptical about about what you see on CNBC. Just just be skeptical.

Steve Davenport 30:20

Yeah, I think that's all I I'd really say is that with the polling markets, I think anything that's newer, anything that hasn't been around a long time, probably doesn't have much of a framework in terms of how it controls the information and it's in development. I think even some time this might be more relevant. And I remember when we used to use, you know, the the British odds makers for some of these um bets because we didn't have them in the United States. Now we have them in the United States, and I'm not sure we're better or worse, but all I'd say is just be careful out there. So um I think that's do you have something else you want to add, or do you think there's something we missed for our investors?

Clem Miller 31:07

No, no, I think we've I think we've pretty much covered that. So just just just remember this is you know, just just use your um I can lose it all pot of money, not anything you really need in the future.

Steve Davenport 31:23

I think that's great advice.

Final Guardrails And Listener Sendoff

Steve Davenport 31:25

Everybody, thanks for listening. And our next podcast is going to be about what's happening in the midterms and what's gonna influence it. So please listen, please give us comments and shares, and have a great Memorial Day weekend. Thank you.