Public Interest or Public Threat? An Analysis of the Rise and Regulation of Political Prediction Markets

Abstract

This thesis offers an analysis of whether political prediction markets should continue to be legal to use in the United States. Through interviews with experts on prediction markets, research of the history of prediction markets, and analysis of a sample of PredictIt traders and their associated trading activity, I evaluate whether political prediction markets pose risks to their users and the general public—and if they exist, if they can be effectively mitigated. Additionally, I examine whether the assumptions that have been made by observers about the demographics of the users of political prediction markets and how they engage with them are accurate. I find that the greatest risks that political prediction markets pose are market manipulation and sabotage or insider trading relating to events linked to individual decisions, misfortune, or loss of life. Additionally, I find that users PredictIt users are unrepresentative of the citizen voting age population from a demographic standpoint, but reflect their partisan preferences well. When pairing data on PredictIt traders with the bets they conduct, I find that traders tend to bet on their preferred political party more than the opposing party to a statistically significant degree. This thesis uses this analysis of the risks and their means of mitigation, informed by an improved understanding of the demographics, political engagement, and betting behavior of the user base of PredictIt and potentially similar markets, to recommend that position limits be imposed on traders to prevent market manipulation and that a class of “meme and misfortune” event contracts be barred from sale on these markets. Additionally, I conclude that traders tend to bet on what they want to happen rather than what they think will happen and that the bulk of activity on these markets is carried out by a small group of active users. I use these conclusions and recommendations to determine that political prediction markets should continue to be legal for use in the United States through the implementation of these recommendations to mitigate the risks they pose. This thesis contributes to the literature surrounding political prediction markets by offering a novel analysis of the detailed characteristics and trading activity of the user base of a political prediction market and synthesizing a thorough review of these markets’ rise to prominence in the 2024 presidential election.