Investment

The tech-driven prediction market is growing rapidly – thanks to billionaires

Henry Kravis, Justin Mateen and Anupam Mittal are among the wealthy investors who see a bright outcome for companies rewarding their clients for predicting the future.

TradeX has raised money from a string of billionaires keen to cash in on the late flowering of technology in India. 

The idea that prediction markets produce accurate forecasts was developed by Aristotle in ancient Greece. They gained credibility in 2004 through a book called The Wisdom of Crowds by James Surowiecki

Kravis has bankrolled US-based Kashi following its success in winning regulatory approval. Futuur of Brazil is developing fast under the lead of media entrepreneur Tom Bennett.

Prediction markets offer subscribers the chance to place bets of yes, or no, on the outcome of events. As more people place their bets, the odds rise or fall.

Predictions have always fascinated mankind, hard wired to detect threats to its survival. Nostradamus’ ambiguous forecasts are regularly twisted into bad news. FiveThirtyEight, hosted by Nate Silver and owned by Disney, is entirely dedicated to the impact of opinion polls, which dominate the news agenda before elections. 

Hedge funds tend to look closely at deals which fail to excite other investors knowing they could be cheap.

The idea that prediction markets produce accurate forecasts was developed by Aristotle in ancient Greece. They gained credibility in 2004 through a book called The Wisdom of Crowds by James Surowiecki. 

He found evidence that groups of people with independent views reached more accurate forecasts than experts sitting in a meeting. A well-educated pool of voters with sufficient skills to understand a problem are even better at their task, once their rogue opinions are netted off. 

The system breaks down when individuals lack the skill to take an informed view: complex problems are particularly hard to solve. 

Wisdom also suffers when groups of people are too small, or share the same viewpoints. Excessive optimism recently led to a boom in tech stocks which skewed opinion, leading to the madness of crowds. A swing to pessimism led to a price slump in 2022.   

But fans of prediction can argue, most times, that a binary bet offers investors a more reliable hedge against outcomes than through stocks, whose prices are driven by complex factors.

Google is among the companies now using internal prediction markets to decide whether its strategies are going to work. CME Group, the derivatives giant, is inching in the same direction by planning to offer event-based contracts, where clients can take a view of underlying sentiment.

An early tech-driven prediction market was run by Dublin-based Intrade.com – a world leader between 2008 and 2012.  But its activities were cramped by regulatory priorities and the business failed to attract sufficient liquidity – a serious threat to any prediction market.

Regulators are worried that big bets would encourage people to change outcomes in the real world. Two new prediction markets, Polymarket and Augur, using cryptocurrencies, have been distracted by regulatory requirements.

Predictit, started in 2014 as an academic exercise, managed to win US regulatory support by limiting its book of traders, plus the cash rewards they could expect.  Its political bets have attracted attention, not least because its clients include well-informed politicos. The latest odds suggest Ron de Santis has edged ahead of Donald Trump as prospective Republican presidential candidate in 2024. 

Kalshi is a new entrant which allows bets of up to $25,000 relating to 2,600 trades related to financial events like interest rates, gas prices and inflation, plus general topics like the next Covid wave or the results of the Grammys, excluding sport betting.

Kalshi is founded by two MIT maths graduates aged 24, Launa Lopes Lara, a former ballerina, and Tarek Mansour, an ex-Goldman Sachs intern. 

Against the odds, they were given the nod in 2020 from the Commodity Futures Trading Commission. They are now trading two million contracts a week, but need to achieve more.

Henry Kravis, co-founder of KKR, invested in Kalshi in a $30 million funding round in 2021, as part of a recent drive to back young entrepreneurs. Other investors are Charles Schwab, renowned for his namesake advisory firm, and VC giant Sequoia. Other investors include Justin Mateen, co-founder of Tinder, the matchmaking service, and angel investor Cem Garih of Alarko Ventures.

Mateen and Garih also invest in TradeX, founded in 2021. As well as Mittal, a media tycoon, its backers include Rajesh Shawney, chief executive of InnerChef and Maninder Gulati, former McKinsey and Lightspeed executive. VC backers include TDV Capital and Soma Capital.

TradeX co-founder Ankit Shrivastava says: “Prediction markets give people a financial incentive to seek the truth, then protect them with the twin shields of pseudonymity and decentralisation.”

Futuur started operating in 2017. According to bets on its site, only 39% of punters expect a peace deal between Russia and Ukraine in 2022. Around 69% expect China to take military action over Taiwan by 2026. Around 72% expect Brazilian president Jair Bolsonaro to be tried for crimes against humanity for his mishandling of Covid.

Futuur is led by Tom Bennett, co-founder of video syndication business Pond5, bought by Shutterstock for $210 million in May 2022.

On prediction markets, Bennett told Medium: “At the collective level, truth is often trumped by tribe. Where there is a surplus of information vying for our attention it’s easy to select and organise it in a narrative of choice – which, in most cases, aligns with preconceptions.” 

He believes people incentivised to make individual wagers on binary decisions can create a fairer collective result, to the benefit of society, as well as his company.

 

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