Study Questions the Fairness of Prediction Markets

In a recent report, Hersh Shefrin of Santa Clara University’s Markkula Center for Applied Ethics examined how fair platforms like Kalshi and Polymarket really are. The report examines who holds the advantage when money is on the line and contends that the growth of prediction platforms may have outpaced existing ethical and regulatory frameworks.

There Is a Noticeable Imbalance Between Traders

Prediction markets allow users to trade on the outcome of real-world events, such as elections and sports competitions. The system attracts users thanks to its speed and availability. Prediction markets appeal to both sports bettors and retail investors, which is one reason for their massive success. Major platforms now boast billions in trading volume, a sign that such companies have moved into the mainstream.

However, Shefrin argues that popularity does not equal fairness. His analysis divides fairness into multiple layers, beginning with basic concepts such as voluntary participation and truthful information. Other standards include equal access to information, balanced decision-making, and protection against exploitation. By those measures, prediction markets often face challenges.

Professional traders have been purchasing access to big-data streams from third-party providers to have a leg up. In this environment, casual traders have almost no chance of succeeding for extended periods.

Hersh Shefrin

The main issue centers on the power imbalance between participants. A small fraction of users accounts for a disproportionate share of profits, while the majority lose money over time. While this dynamic is not unique to prediction markets, the level of unfairness may grow exponentially as advanced traders gain access to better data and tools.

Prediction Markets May Lack Critical Safeguards

Shefrin’s report also analyzes the social impact of prediction markets. Most US platforms focus on contracts that resemble sports betting, a category especially popular among young men. While some treat prediction markets as entertainment, it may spiral into compulsive behavior, leading to severe financial and personal consequences.

Perhaps the most important ethical issue for prediction markets is regulating them to make them fairer in the sense of freedom from impulse.

Hersh Shefrin

Ease of access is also a risk factor, as modern apps make it simple to place trades in seconds. Shefrin points out that prediction markets use strategies similar to those of gambling apps. These include a fear of missing out and promoting the belief that a quick win is just one decision away. Integrity concerns also remain, as markets tied to real-world outcomes can create incentives to influence those outcomes.

Despite the criticism, the report stops short of recommending a full ban. Instead, it asks how these markets can become fairer for consumers. Shefrin recommends stronger consumer safeguards such as trading limits, clearer disclosures, and protections against gambling harm. Narrowing the information gap between users could also work, though it would be challenging to implement.