SYLVIE DOUGLIS, BYLINE: NPR.
(SOUNDBITE FROM “WAKING UP TO THE FIRE” BY DROP ELECTRIC)
DARIAN WOODS, HOST:
If you follow the news you will be bombarded with people making predictions. Gas prices will continue to fall or they will rise. Congress won’t pass this bill until the end of the year, or it will pass it immediately. Now these people just talk. They’re just something like semi-experts saying one thing and the other. But, you know, I might trust them more if they lost or won some money on it — you know, if they made a bet, if they profited if they were right and lost if they were wrong lie.
This is THE PLANET MONEY INDICATOR. I’m Darian Woods, joined here today by my former colleague Jacob Goldstein. Welcome to the broadcast.
JACOB GOLDSTEIN, BYLINE: Woo-hoo (ph). Hello Darjan.
WOODS: It’s good that you exist.
GOLDSTEIN: It’s fun talking to you here. Yes, thanks.
WOODS: So you’re now hosting a podcast called What’s Your Problem? That’s from that podcast – an episode about betting markets.
Goldstein: Yes. So recently for this show “What’s Your Problem?” I interviewed the co-founder of this neat new company, which is essentially a market where ordinary people can bet their own money on what’s going to happen in the future — you know what bills Congress is going to pass, how much inflation is gonna be And if it works, if this market grows and attracts a lot of people making a lot of bets, it could be a new tool to help us think about the future. This is after the break.
(SOUNDBITE OF THE MUSIC)
GOLDSTEIN: I recently spoke to the co-founder of this new exchange where you can bet on real events. Her name is Luana Lopes Lara. And the exchange is called Kalshi.
LUANA LOPES LARA: KALSHI dot com.
GOLDSTEIN: You have to spell it every time.
LARA: I do. It’s a tough name.
GOLDSTEIN: What’s the name?
LARA: My co-founder is from Lebanon. So Kalshi means everything in Arabic.
GOLDSTEIN: It means everything.
WOODS: Luana and her co-founder did internships at Wall Street trading desks while they were in college, and it was kind of surprising to them that something like Kalshi didn’t exist in the US yet, so they looked into it. Why hasn’t someone already created a market to bet on events?
LARA: The answer was loud and clear regulation. The background is essentially that events are considered commodities and trading in commodity derivatives is regulated by the CFTC.
WOODS: The Commodity Futures Trading Commission – the CFTC had allowed a small prediction market and it was called PredictIt. PredictIt was actually started in my home country of New Zealand by some academics. PredictIt allowed a small number of people to bet a limited amount of money on election results. It was non-profit. It was there to study prediction markets. But earlier this month, the CFTC said PredictIt had failed to follow promised rules and PredictIt would have to be shut down early next year.
GOLDSTEIN: I spoke to Luana before this CFTC and PredictIt thing happened, but she told me it took Kalshi — it took her company over a year just to get CFTC approval for her own market. And they’re obviously trying to stay on the good side of the regulator.
LARA: We wanted to, you know, start slowly and make sure we didn’t break anything. I think we worked very hard on the regulations so we want to make sure everything goes right.
GOLDSTEIN: Move slowly and don’t break it.
GOLDSTEIN: So the anti-Facebook.
Laura: Exactly. We are the anti-Facebook for sure.
WOODS: Kalshi is playing it safe for now. It doesn’t let you bet on elections, but you can bet on some political issues. Will the federal government issue student loans this year? And there are plenty of economic things to bet on, like whether the economy will contract in the second half of the year.
GOLDSTEIN: And yes – so just to really talk about how Kalshi works, let’s look at one of them specifically. Let’s do mortgage interest, right? Mortgage rates are important to the economy. They’re obviously a big deal when you’re looking to buy a home. So – OK, so on Kalshi now, you can bet on the question, will mortgage rates rise over 6% by the end of the year? And right now, the odds of Kalshi on that bet are about 3 to 1. So if you bet $100 on mortgage rates going above 6% and that happens, you would win about $300.
WOODS: And the important thing here is that the odds go up and down based on how much people are willing to bet. So if you’re betting that mortgage rates will go above 6%, there’s someone on the other side who’s betting they won’t go above 6%. And when you look at the odds, it’s essentially the market’s prediction at that moment of the likelihood of something happening. Right now, the market — at least the small market that Kalshi has built — says mortgage rates are unlikely to rise above 6% this year.
GOLDSTEIN: And there’s another interesting detail about how Kalshi works, right? So when you’re betting on mortgage rates, you don’t just have to wait and see if you win or lose and either win big or lose it all. You can actually sell the bet to someone else. So that way, it’s like buying a stock, you know? And then, when the odds are in the market moving in your favor, you can sell it for a profit. If the market odds go against you, you can sell at a loss, but you still don’t have to lose your entire bet. So it’s really that kind of dynamic functional market.
WOODS: So that’s how Kalshi works. And we should add that Kalshi takes no position on any of these bets. It makes money by charging a fee of around 1%. Anyway, Luana and Kalshi didn’t go to the CFTC, the regulator, and say we want to start a casino for nerds. No, they had to argue that Kalshi would actually be useful to humans.
GOLDSTEIN: The CFTC also regulates these giant futures markets in things like wheat and oil, and part of what’s going on in these markets is risk hedging by people. Farmers can buy futures to lock in the prices of a future crop. Airlines can use oil futures to protect against fuel price fluctuations. And Luana told me that Kalshi’s pitch to the CFTC was that, you know, they could do something similar for ordinary people.
LARA: People take a lot of risks for which they don’t have access to insurance these days. For example, normal people can’t hedge against rising mortgage rates or things like gas prices. And these are real risks that ordinary, everyday Americans face. And it’s up to the CFTC to direct the way they also get access to those hedging things that the big boys can do.
GOLDSTEIN: I’ll say I don’t realize that normal people, on average, would be able to hedge in a meaningful way using predictive markets. I feel like an interesting possible case for Kalshi’s usefulness is some kind of wisdom of the masses idea – right? – like the idea of people going on the news or whatever and saying things about the future. But they could lie. You could be wrong. They might say something because they have an investment they don’t tell you about. When people bet their own money on something that’s going to happen in the future, I’m more inclined to believe them, right? So if there’s a large, well-functioning market where a lot of people are betting a lot of money on something that’s going to happen in the future, that seems like useful information.
Laura: Absolutely. We call this the cop tax, right? It is…
LARA: It’s so cheap to just go on twitter and look at inflation – right? – last year. Everyone’s like, oh, inflation – it’s nothing. Oh, we’re going to see hyperinflation. And if you just have a market where people can put money where their mouth is and actually be like that, I actually bought that position, that’s what I believe you’re really taking out a lot of that knowing You, just exaggeration for, like, hype and things like that.
WOODS: I love this idea of a tax on BS, I have to say. But I’m also a bit skeptical. I mean, Kalshi isn’t going to be this magical oracle that sees into the future, is it?
Goldstein: Yes. I mean, right now Kalshi is certainly just this very small market where prices fluctuate a lot. And even if it gets bigger, you know, of course, the future is inherently uncertain. But it looks like Kalshi is growing if there’s more trading, if more money hits the market, then it’s at least something to consider as we think about the future. It could definitely be a useful addition to what we have now, which is random experts talking about the future without risking any money.
WOODS: You can find the full interview on Jacobs Podcast. “What is your problem?” The show was produced by Corey Bridges with engineering by Robert Rodriguez. It was fact checked by Kathryn Yang. Viet Le is our executive producer and Kate Concannon is editing the show. THE INDICATOR is an NPR production.
NPR transcripts are prepared by an NPR contractor on a rush schedule. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR programming is the audio recording.