As the 1549 papal conclave dragged on into a second and third month, Venice’s ambassador to the Vatican, Matteo Dandolo, was outraged by insider trading.
“It is more than clear that the merchants are very well informed about the state of the poll,” he said, “and that the cardinals’ attendants in Conclave go partners with them in wagers, which thus causes many tens of thousands of crowns to change hands.”
This time the ultimate authority is not the pope but the US Supreme Court. At present, the US’s biggest political betting markets are offshore. The only legal, regulated entities are nonprofits run as academic experiments with tight limits on how much can be wagered—the best known are the Iowa Electronic Markets and PredictIt.com, which operates in the US under the auspices of Victoria University in New Zealand.
On the other side, Kalshi’s supporters argue that manipulation is a problem for all markets, and the key is regulation. David Mason, general counsel of PredictIt and a former chairman of the Federal Election Commission argues, “these manipulation problems are dealt with in regulated markets every day. There are trading exclusions; if they have material non-public information then they are prohibited from trading. Kalshi has a long list of people who aren’t allowed to trade.
Then there’s what Wall Streeters call the Elaine Garzarelli Effect: We tend to place excessive trust in whichever guru made a good call last time. As a Lehman Brothers investment strategist, Garzarelli brilliantly urged clients to get out of the stock market the week before the Black Monday crash in 1987. That made her one of the most widely quoted strategists on the Street; her words would move markets, and she compiled a good track record.
In the UK’s Brexit referendum, betting markets put the chances that Britons would vote to leave the EU at one in five. Statisticians David Rothschild and Andrew Gelman argued afterwards that there was “a feedback mechanism whereby the betting-market odds reify themselves.” People distrusted polls, they said, but “we do watch the prediction markets, which all sorts of experts have assured us capture the wisdom of crowds.
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