Addictive By Design? Prediction Markets Could Face Legal Problems

Prediction market operators frequently call themselves providers of financial services, something that critics disagree with, pointing out to the fact that they function more like gambling platforms.

Generally put, the way legal courts react to these “yes/no” exchanges is likely to significantly shape potential legal responsibilities for the industry. 

However, J&Y Law experts like founder and managing partner Yosi Yahoudai believe that it’s not a matter of whether prediction markets are legal, but if they are designed in a certain way.

Potential Product Liability Cases  

If evidence shows that operators understood the psychological impact of their platforms, recognized that young users are vulnerable, and prioritized growth over safeguards, courts could view related lawsuits as product liability cases rather than financial disputes.

Some of the ongoing class actions focus on whether these platforms are effectively unlicensed sportsbooks. These cases frequently mention concerns regarding platform design, including addictive features and insufficient consumer protections. 

Plaintiffs would need to demonstrate that the platform’s structure caused measurable harm, that safeguards were weak, or that the operators knew the design could be harmful. 

Similar arguments have been made in lawsuits against social media and gaming companies, particularly around addictive design and youth targeting.

“Younger adults consistently show higher rates of risky gambling behavior than older groups,” Yahoudai points out. His views are reinforced by Alex Boris, Senior Trial Attorney at J&Y Law who also worked in Washington, D.C. for the American Gambling Association. 

“Younger users are still developing financial judgment and impulse control, which makes that loop more dangerous,” believes Boris. 

Many young participants who use prediction markets are under the impression that they are simply exploring economics, sports, or politics. 

In reality, they are prone to exposing themselves to specific financial and psychological risks that resemble disturbing gambling behaviors.

Legal Theories

Legal challenges could include “negligent design, failure to warn, unfair or deceptive business practices, targeting vulnerable populations, and consumer protection violations”.

Plus, foreseeability and intent will likely be key standards in evaluating these cases, particularly whether operators anticipated harmful behavior among their users.

Despite efforts to appeal to professional traders, critics argue that exposing inexperienced participants to sports-event contracts or speculative markets increases the risk of harm. 

According to the National Council on Problem Gambling, around 2.5 million US adults fall into the category of players who suffer from severe gambling problems. An additional 5 to 8 million experience mild or moderate gambling-related harm.