Prediction Markets Let You Bet on Just About Anything — But There Are Risks
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Welcome to nerd wallet smart money podcast and test vign in for .

some piles and i'm on a hill hoskyns.

And this is our weekly money news round up where we break down the latest in the world of finance to help you be smarter with your money. We will go deep into a single topic, then leave you with the latest money headlines. Today we're talking about prediction markets.

These are companies like predict IT and calls I. We're going to talk about what they are, how they work and how the election has raised their profile. Joining us the same tab, the writer of the nurse and faster email newsletter. Sam, thanks for joining us again.

Happy to be here.

So you've mentioned prediction markets in some previous episodes. You've also mention something called an event contract. So let's start with that term. What are event contracts?

An event contract is a type of investment instrument that lets people speculate on whether a particular event will happen or not. That event might be something finance related, like will the S M P. Five hundred clothes above seven thousand points by the end of the year.

IT can also be a political question, like will daoud trump in the presidential election, or IT can also be something sports or pop culture related. In the last couple of weeks, people have used Polly market and have traded the event contracts on Polly market to speculate on the outcome of the mike tyson, jake pol fight. Event contracts can cover any kind of yesterday. No question that will get a definitive answer at some point in the future.

And how do these things work?

Event contracts have a face value in dollars, and that's typically one dollar per contract, but in the lead up to the event in question, traders can buy yes or no positions on the contract for some amount between zero dollars and one dollars that is determined by the market.

The markets odds that the thing will happen once the event happens or doesn't happen as IT may be, and we get a definitive yes or no answer to the question, then the contract pays out one dollar to whoever was right. For example, suppose you paid twenty five cents for a yes position on a contract about whether the S. M.

P five hundred will close above seven thousand by the end of the year. Then suppose that actually happens, you'd receive one dollar from your twenty five cent investment, so you'd be quite tripling your money. And if you bought a twenty five cent yes position on a thousand contracts, you'd get a thousand dollars from an an initial investment of two hundred and fifty dollars.

So then contracts let you bet on future events. What are prediction markets?

Prediction markets are the online trading platforms where people can buy and sell yes or no. Positions on the event contracts predicted and Polly market are some of the biggest prediction markets, although Polly markets technically not available in the U. S.

There's also another big one called called I then there are a couple of conventional stock brokers, Robin hood and interactive brokers that actually Operate their own in the house prediction markets. There are couple different ways to make a profit in these kinds of markets. You can either buy a position and hold IT until the event in question and make money of your prediction was right. You can also potentially buy a position that and then resell IT to another trader for a higher Price before the event in question.

All right. Honestly, this sounds a little bit like gambling, and some listeners might be surprised to hear that you are allowed to bet on elections. That's legal.

That's a good question and an unresolved question. yes. Prediction markets are definitely one of those things that kind of in a gray area between high risk speculation and gambling, along with small script currencies and meme stocks and things of that nature.

When IT comes to the legality of these things, that is also an open question. Until recently, as you mentioned, election bedding has generally been considered to illegal in the U. S.

In part because there is a concern that I could harm election integrity. IT could create an incentive for someone to stand for election, is a candidate, and then lose deliberately for a betting market, pay out or something like that. Regulators, including the commodity strating commission, have been trying to shut down these election related prediction markets on that basis, among others.

As I mentioned earlier, Polly market, which I believe is the biggest of these things, is blocked in the U. S. The regulators managed to shut them down in the U.

S, although that hasn't stopped some U. S. Users from session IT in various ways through various kinds of internet technologies. But the rest of these prediction markets are defective legal for the time being because of a decision in an ongoing court case between koshi and the cftc back in october of federal appeals, current ruled against A C F T C effort to block counties event contracts from trading. Well, this court case plays out. That doesn't mean that coach won the case or that prediction markets on elections are definitely illegal, but IT might turn out that way. And the courts have given these markets the Green light to Operate until that cases decided.

So that's how people were legally bedding on this recent presidential election, some illegally. Anyway, on a leader note, does trumps win mean anything for the future of prediction markets?

Yeah, I think that this election outcome was a very significant moment for these things for a couple of different reasons. For one thing, this was a very high profile case of prediction markets making a correct prediction when a lot of other experts didn't were a little more in big U. S.

If you looked at election models or poll aggregators in the days leading up to the election, most of them showed just a fifty fifty coin toss. But the prediction markets were different. Most of the major prediction markets favor trump. And what does that mean that prediction markets are perfect Crystal balls? No, this is a sample size of one event, but its a very significant indication.

So as medication, what does trump s Victory mean for the regulation of these things? You mentioned that an ongoing issue as well.

Of course, it's a little hard to predict what exactly the incoming administration will do, but there are some early indications that trump might be fairly lenient with these things, particularly compared to what a democratic administration might have done, after all, downsizing the government and cutting regulations, particularly regulations on the financial sector, was a pretty consistent theme of trump campaign.

For example, he's been very critical of gary gan, seller, whose the chair of the security and exchange commission, in part because he feels that they may have been too strict on things like crypto currency in other new financial technologies. There was a reuters report a few days ago that said the trump might appoint dan gallagher, who is currently the chief legal officer of Robin hood, to leave the S. C.

C instead. Again, Robin hood d is one of the platforms that has allowed investors to speculate on this recent presidential election using event contracts. So if front puts their top lawyer in charge of a major financial regulator, that would probably signal a Green light for these types of prediction markets.

Sounds like we might be hearing more about these things in the year ahead. Sam, can you tell us a bit about the risks of prediction markets? Are there something that most investors should be participating in?

Before we get into that, we have to do a little disclaimer here where not financial advisers, this podcast is not financial advice and everyone's needs and circumstances are different. Having said that, there are couple reasons to be cautious about putting money into prediction markets. For one thing, they're not long term investments.

These are short term bets and there everything or nothing. If you're investing for a long term goal like retirement, most advisers are going to steer you toward passive investments that slowly but consistently grow your money over time. Index funds and things like that.

Event contracts are much, much rescuer than that. Also, we talked about how tion markets are kind of like gambling. And I mean, in some cases, like the people betting on the ties and qualified, that very literally, is gambling. As we all know, gambling can be addictive if you're on track to meet your financial goals and you have some extra money and you really want to dip your toes into prediction markets just for fun, there are some guidelines that probably worth following, don't bet any more than you can lose. Treat your bets like their entertainment expenses, not like their investments that you're expecting to get back.

just like when you walk and to a casino in vegas. Yeah, we should also mention that if you feel you have a gambling problem, there are resources available to help. The national council on problem gambling offers a phone, helps eline at one eight hundred gambler that's eight hundred four to six, two, five, three, seven, as well as text message help at eight hundred G A, M. And also an online chat to help on its website.

Sam, thanks so much for joining us.

Thanks for having me on. And if listeners ers want to learn more about this, we're going to be writing about IT in the upcoming issue of the nerdy investor news letter.

Go ahead and subscribed to that up next. We ve got a few many headlines from the last few days.

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Well, honor, the labor department reported on the latest inflation figures. And hey, guess what happened? what? Not much. The consumer Price index ticked up two tenth of a percent in october. Prices were up two point six percent over the same time a year ago that was higher than the two point four percent rise in september. Uh, so called core inflation, which strips out vital food and energy Prices, states study at three point three percent that .

core inflation is a key economic indicator that the federal reserve looks at as it's deciding what to do with interest rates. The feds long term goal is two percent inflation. So we're not there yet, but we're still way, way down from the peak inflation of june twenty two, which was nine point one percent.

yeah. The fed's current campaign of lowering interest rates began in september with a half percentage point cut than another quarter percentage point couple of weeks ago. IT will meet again in .

mid december. Visitors might remember a few weeks ago, we mention that the federal trade commission issued new rules that would make IT easier for consumers and subscriptions and memberships. And the automatic payments that usually come with .

them is called click to cancel. And the ftc wants IT to be as easy to exit those subscriptions and memberships as IT is to sign up for them. Companies are no longer allowed to force you to contact the customer service agent in order to get this done, and they can't convert a free trial to a paid subscription without getting your say so well.

The consumer financial protection bureau says that will be enforcing that rule and plans to, quote, take action against consumer financial firms and other covered entities that violate the click council rule.

The bureau also noted that some credit cards give users the option to block certain recurring payments. The click council rule is supposed to go into effect about five month from now. So if you're desperate before, then there's a protect for you. And finally, honour, it's time to get into the spirit of things, not the holiday, but bankrupcy.

Ah yes, the spirit airlines bankrupcy low budget goes even lower .

yeah the discount Carrier announced filed for chapter eleven bankrupcy protection. This comes after a couple of failed attempts to merge with frontier and jet blue. The company was dealing with a debt burden of some three point six billion dollars.

So here's what this means for you, courtesy of our nerdy colleagues who cover the travel industry. First, yes, your flight might be cancelled. Check with the airline.

Second, the airline has not said anything about further cuts in routes after acting thirty last month.

And third, what happens to your free spirit? Frequent flare points unknown at this point, but our colleague s say you should be able to use them per usual until it's announce. Otherwise, once the airline is in bankrupcy core, it's possible that program will see changes if .

you have voulons res, though those should continue to be honored and that IT for this weeks. Money knows we always welcome your money. Questions and comments turn to the nerd s and color text as your questions and nine o one seven three zero six that's nine to one seven three zero N E R D or sentence of voice memo at podcast at nerd wallet ta com and remember, you can follow the show on your favorite podcast APP, including spotify, apple podcast and I heart radio to automatically download new episode.

Today's episode was produced by tests and edited by rick van or knife.

And here's our brief discourse imer that sam also read earlier. We are not financial or investment advisors. Disney info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

And with that said, until next time turn to the nerves.

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