The Economics of Kalshi

So let's talk about some of the social benefits of prediction markets.

So economists are pretty open to them for some of the reasons that you've alluded to, right? So, you know, we do see the prices that you generate as aggregating that dispersed knowledge that we have.

That's right.

So it's a very Hayekian, Friedrich Hayek kind of principle about the wisdom of crowds bringing together the prices.

And One consequence of that is that we imagine, because people have financial stakes in what they're betting on, what they're putting their money on, that people care a lot about their forecasts.

And so as a result of that, the prices or the forecasts will tend to be more accurate on average than perhaps a panel of experts.

I've seen this recently with the Federal Reserve.

There was a paper that came out quite recently that showed that the implied predictions about the direction of inflation on platforms like Kaoshi was far more accurate than the Bloomberg consensus of economists.

Are there any other examples, actually empirical examples of where your implied predictions have been much more accurate than perhaps experts or other information gathering entities?

There are many, many examples.

I mean, you know, there's a lot more papers out there being written about this.

And I love going back to Hayek, because, you know, when I decided to start the company, I actually read a lot of Hayek.

And I think Hayek is actually the founder of prediction markets.

I think at the time he didn't really call them prediction markets, he called them information markets.

And, you know, at the time he talked about how market prices are a very good way to surface information because markets incentivize people to acquire or seek knowledge and then use that knowledge to trade and they get rewarded if they're right, if their knowledge is high quality, if that piece of information they have is high quality and they get punished if their piece of information is bad.

Like, you know, and markets do a very good job at averaging all of that out.

You know, and it's...

And before getting into examples, I think there's like two foundations, like two reasons why that works.

So one is skin in the game, right? And there's a very easy way to think about that.

Like why is skin in the game good? It's because it's a very clean incentive towards truth.

Talk is cheap.

Talk is very cheap.

I mean, I sometimes think about prediction marks as a tax on bullshit, but like if you write something on Twitter that's completely false, what is the punishment for that, right? And the example I like to think about is like, you're thinking of Thanksgiving and you're having dinner and you always have a relative that's so certain about everything.

They're so dogmatic about every single view that they have.

And then the minute you tell them, like, hey, how about you put $50 on this, they get way more careful.