Sign up to receive CFR President Mike Froman’s analysis on the most important foreign policy story of the week, delivered to your inbox every Friday afternoon. Subscribe to The World This Week.
More From Our Experts
I am often asked to make predictions about this or that geopolitical development around the world. I have seen enough errors (mine and others) to develop a certain degree of humility about any single person’s capacity to do so. Save for the Oracles of Delphi, predicting the future is difficult. But a new class of prediction markets is giving it the college try.
More on:
On Polymarket, Kalshi, and a number of other platforms, you can now make substantial bets on the outcome of geopolitical contingencies, including the likelihood of a ceasefire in Ukraine by 2026 (25 percent chance), the likelihood of China invading Taiwan in 2025 (6 percent chance), and the end of Ayatollah Ali Khamenei’s tenure as Supreme Leader of Iran in 2025 (19 percent chance). This year so far, speculators have wagered tens of millions of dollars on these markets, with transaction volumes rising steadily by the day. Bettors placed well over $1 billion in bets on the outcome of the 2024 U.S. presidential election alone.
Setting aside the ethical and legal issues posed by these markets, these platforms are an interesting democratic experiment, particularly for those of us in the policy community who place significant value on expertise.
The wisdom of the crowds is hardly a new proposition. In 1907, the British polymath Sir Francis Galton designed a simple experiment: at a livestock fair, he collected 787 betting slips for a small fee from townsfolk and farmers alike, asking each to guess the weight of a prize ox. Individual guesses ranged widely, but the median guess came in at 1,207 pounds, a mere 1 percent more than the ox’s true weight. So humbled was the aristocrat that he declared, “This result is, I think, more creditable to the trustworthiness of a democratic judgment than might have been expected.”
More From Our Experts
It is one thing to size up an ox, and another to size up Trump and other world leaders’ geopolitical designs. Or is it? In June, when Trump said he was contemplating a strike on Iran’s nuclear program, many Middle East experts dismissed the prospect of U.S. strikes, at least at that moment in time. Prediction markets weren’t so dismissive. They assigned a 58 percent probability to U.S. strikes by the end of the week. As it turned out, seven B-2 stealth bombers were just then en-route to Iranian airspace, armed with fourteen bunker buster bombs.
Although they were all the rage in the 1920s, prediction markets have been taboo and largely illegal to operate in the United States for the past two decades. But the government is actually no stranger to such markets. At one point, the national security apparatus was a power user. In the 2010s, the intelligence community operated an internal prediction market on its classified network called the Intelligence Community Prediction Market. On the platform, more than 4,000 users—consisting of members of the intelligence community—traded more than 190,000 times on geopolitical forecasting questions. The Intelligence Advanced Research Projects Activity has also invested in several large-scale forecasting innovation programs, including the Aggregative Contingent Estimation program and the Hybrid Forecasting Competition. We’re now coming full circle, with Polymarket (now backed by Donald Trump Jr.) poised to enter the United States after a protracted legal battle, and the Commodity Futures Trading Commission taking a laissez-faire approach to regulation, including its decision to permit some forms of sports betting on these platforms.
More on:
Indeed, sports betting is already the highest volume market category on these platforms, which raises a deeper question: what is the real utility of modern prediction markets—particularly in the foreign policy domain? The literature suggests three overlapping possibilities: to hedge economic risk for real world events, to price and thereby predict real world events, and, finally, to delight gamblers. Today’s prediction markets fail on count one, are making strides on count two, and have hit it out of the park on count three. I suspect these dynamics are unlikely to change in the near future.
At their core, markets are information aggregators. When a market is mispriced, market participants have a financial incentive to make a trade and correct the mistake—thus diffusing information. But the capacity of markets to aggregate information is only as great as its liquidity, its depth. In this regard, today’s geopolitical prediction markets generally fall short. Up to now, most prediction markets—with the exception of markets on the outcome of elections—have been thinly traded.
Liquidity could remain constrained for a number of reasons. There is only modest public interest and scant economic value in the outcome of particular geopolitical events. Those with significant financial interests at stake are more likely to hedge their risks through insurance markets than by relying on prediction markets. There are limitations on what events markets are allowed to predict: U.S. law prohibits exchanges licensed in the United States, such as Kalshi, from offering contracts on terrorism, war, and assassination events. These restrictions might well be challenged in court but they exist for good reason, both as a matter of taste and to avoid the dark possibility that one might commit such acts to cash out of a market position. Finally, liquidity constraints are likely to persist until better guardrails are established to prevent and enforce penalties against market abuses, such as insider trading.
Without more liquidity, which is what makes a given price worth its salt, it is prudent to apply a hefty margin of error to the geopolitical probabilities listed on today’s markets. Prediction markets are no cause to cast aside expertise—including or especially the counsel of the scholars, members, and avid newsletter readers in the CFR community. A market is no substitute for domain expertise, it’s a supplement. Prices are a gut check, not a crystal ball. And accuracy is best determined over the long term, with a reasonable sample size, not on the basis of a single trade. One can use prediction markets today to cut through the noise, but not to get to the heart of the matter.
Still, despite their limitations, prediction markets are on the rise. I wouldn’t bet against their growth. As Galton presciently observed, “in these democratic days, any investigation into the trustworthiness and peculiarities of popular judgments is of interest.”
Let me know what you think about the rise in prediction markets and what this column should cover next by replying to [email protected].