Two News Items about Kalshi. . .

I am a boomer. I grew up with federal agencies empowered to maintain a level playing field in securities markets and with federal and state laws that regulate gambling, including bets on criminal acts such as assassinations and bets on the outcomes of elections. I like that legal environment. There is just too high a likelihood for bad outcomes in the absence of such limitations on our caprice. Call me old fashioned. Unlike our incoming Secretary for Homeland Security, I think duels are a bad thing.

I am also not averse to some governmental paternalism. Gambling is an addiction. The government has the responsibility to protect us from harms, even self-inflicted harms. I agree with Martha Fineman. Human beings are vulnerable. That fact should be the be the starting point for evaluations of the relationship between regulation and individual freedom.

But the Overton Window has shifted. It is now okay to bet on just about anything, so long as you call the enterprise a “prediction market.” Kalshi and Polymarket are the leaders of this burgeoning industry. Boaz Sobrado reported on the growth of prediction markets in Forbes last December. In 2025, the volume on prediction markets reached $44 billion, with Kalshi and Polymarket accounting for $38.5 billion combined. And monthly open interests (an open interest is a bet that has not yet been resolved) quadrupled in 2025. While sports betting remains the most common activity by volume on prediction markets, because they remain open longer, open interests in politics and economics account for 2.5 times the open interests in sports. In short, by one metric, for every dollar being wagered on sports these days, $2.50 are in play betting on politics and the markets.

One problem with prediction markets, identified in Mr. Sobrado’s article is insider trading. He reports on a trader who won $1 million by accurately predicting 22 of 23 of Google’s picks for most searched topics of 2025. It’s unlikely that those were just lucky guesses. But that’s just about money. There is also evidence of insider trading on political events. Brandon Kochkodin rerported in Forbes on evidence of insider trading on prediction markets relating to the Nobel Peace Prize. Ten hours before the recipient of the prize was made public, María Corina Machado’s odds of winning jumped from 3.6% to 73%. Somebody got a tip about the Nobel Committee’s intentions and decided to cash in.

Psych!

She gave the prize to someone else, so who really won?

Hugh Cameron reported in Newsweek on suspicious bets on the start of the ongoing U.S. war in Iran. Six suspicious accounts made $1.2 million with very well-timed bets. At least one of the accounts bet on nothing else but then won $500,000 on a bet that war was imminent. Who needs a Signal account to get tipped off about a U.S. military operation when you can just watch the prediction markets?

Now (story 1), Kalshi is defending a rather macabre class action brought by traders who participated in a prediction market contract titled “Ali Khamenei out as Supreme Leader?” Members of the purported class allege that they correctly predicted that Mr. Khamenei (below in a photo from 1980) would be out. Kalshi is in a bind, however, as its rules do not allow wagers (“predictions”) about political assassinations. Even Kalshi recognizes that such a market would create perverse incentives. According to the Complaint, the market opened January 8th, and users could “trade event contracts on whether Ayatollah Ali Khamenei would leave office as Supreme Leader of Iran before specified dates, including March 1, 2026 and April 1, 2026.” If Khamenei left office before March 1, the market would resolve to yes.

Well, he left office, in a manner of speaking. He was killed on February 28th in joint attacks on Iran by Israel and the U.S. Kalshi invoked a “death carveout,” settling the market at the last traded price before death. The Complaint characterizes this “death carveout” as a “fine-print mechanism,” which leaves me wondering, what’s wrong with fine print all of a sudden? But mostly I’m wondering how it came about that I live in a world in which people can legally place best on such matters.

I am not alone (story 2). Natallie Rocha and David Yaffe-Bellany report in The New York Times that the state of Arizona has filed criminal charges against Kalshi for operating an illegal gambling business. States have sued both Kalshi and Polymarket before, but in civil suits, so the criminal action ratchets up the stakes in this struggle. Hey! I wonder if there’s a prediction market on the outcome of these cases.

No I don’t.

I assume there are multiple markets related to these suits.

Kalshi claims that it would welcome regulation. However, it claims that it should be regulated by the Federal Commodity Trading Commission and should not be regulated as a gambling operation. I think I get the reasoning. A prediction about politics or sports or anything else can be structured like an ordinary contract for commodity futures. I hope that the authorities (and I don’t know who decides such things) will reject that analogy. Prediction markets are gambling, but they are a form of gambling that invites even more mischief than other kinds of gambling — not just only the ordinary mischief of preying on the vulnerabilities of others but the more destabilizing mischief of geopolitical manipulation in pursuit of private economic gain.

A coda. I learned from Matt Levine’s Money Stuff column (subscription required) about this story by Emanuel Fabian in The Times of Israel. Mr. Fabian reported that an Iranian missile managed to get through Israel’s missile defenses and explode, relatively harmlessly, outside of Beit Shemesh. His story includes a video of the impact, and Mr. Fabian is confident that his reporting was accurate. Nonetheless, he quickly started receiving increasingly urgent requests from strangers to update his reporting to indicate that the impact was not from a missile but from missile fragments after the missile itself had been destroyed by Israel’s defenses.

Mr. Fabian discovered that the messages he was receiving (on multiple platforms) related to a $14 million prediction market on “Iran strikes Israel on…?” The market would not resolve to “yes” if the Iranian projectiles were intercepted. A lot of money was riding on Mr. Fabian’s reporting, as it turned out. Soon he was receiving threats. For example:

And

Mr. Fabian contacted the police, and they are investigating. Polymarket denounced the threats and claims that they violate its terms of service. It also claims to have banned the accounts that were involved and shared information with the relevant authorities. It’s a start. How about ending the ghoulish practice of allowing people to speculate about where bombs are going to drop?