Table of Contents
Warren Buffett said two years ago that the stock market was becoming increasingly “casino-like”. He and his longtime business partner, Charlie Munger, argued that market speculation solely for quick profits, without regard for the value of underlying assets, is really just gambling.
Buffett attributed the problem to the increasing gamification and accessibility of trading. “The casino now resides in many homes and daily tempts the occupants.” Unfortunately, as Munger put it,
“They love gambling, and the trouble is, it's like taking heroin.”
What Munger presciently realized years before the loud arrival of prediction markets was that gambling is the objective of the American consumer. This is why the legalization of sports betting just 8 years ago has ballooned to a $100 billion industry. After an explosive year of growth, analysts are projecting that prediction markets will reach $240 billion in market value this year, and $1 trillion by 2030.
The meteoric rise indicates that individuals either don’t believe they can put their money to productive use or simply find it easier to gamble. Instead, they have become spectators, betting on the game of reality rather than playing themselves.
This is not a moral neutral or a societal net zero. Prediction markets drain human agency and human capital, resulting in a people that are economically and socially regressed.
Using Prediction Markets is Personally Imprudent
Sportsbooks win because, on net, only 3-5% of sports bettors win in the long term. Just as Vegas casinos will ban card counters and habitual winners, online sportsbooks will limit or even ban users who are making too much on the platform.
Prediction markets are threatening traditional gambling and maintain similar results. 84% of Polymarket traders are losing money and 1% of traders make 84% of all profits, most of them via arbitrage bots.
Alternatively, a disciplined investor in the stock market is betting on America's future, which, as Buffett has also explained, is the surest bet we have. This is always a more prudent bet than any particular stock or outcome. The reason most users of prediction markets lose on net is, in kind, the same reason why most day traders lose as well. Individual outcomes carry too many factors to predict reliably, and so prediction market bets are no more serious than blackjack.
Prediction Markets Incur Societal Rot
Undisciplined individuals and imprudent choices may seem isolated, but they quickly compound into real societal problems.
Pump.fun, for example, was created in 2024 to enable the easy launch of memecoins, but it quickly became chaotic. Most users lost, some incurred massive losses in scams, all of which resulted in a class-action lawsuit, even alleging RICO allegations. Sam Cooling, in an article on Pump.fun, correctly identified that it was the “speed and ease” of the platform that attracted a degenerate user base.
We have now passed from the threat of memecoins into the realm of national security.
In just a week, over 1 billion dollars of bets were made on the war in Iran, raising serious questions about insider trading. Just days ago, the DOJ indicted a US Army soldier who used classified information to make $400,000 on Polymarket during the US operation to capture Nicolás Maduro. Outside the US, in France, authorities are investigating potential tampering of France's primary weather sensor, coinciding with potential large wins on Polymarket.
The ability for prediction market platforms to regulate this kind of behavior at scale is impossible. In a perverse way, prediction markets are now influencing real-world actions through financial incentives.
Innovation Fuels Growth
Capitalism puts capital and the means of production in the hands of private owners. Prediction markets, on the other hand, are not concerned with investment, ownership, or capital allocation. Unlike the stock market, prediction markets are not inherently tied to assets and capital, which result in real-world productivity.
That is not to say there is no use for tools like option trades, which are not inherently tied to asset value and are simply bets on the direction and price of assets. But while businesses can use options as a hedge against risk, retail traders are not hedging to insure anything. This is why the retail investor is always better off investing in the stock market, participating and buying into the US economic system rather than his favorite sports team.
The 2025 Nobel Prize in Economics on “innovation-driven economic growth” explains the macroeconomic effects of Buffett and Munger’s theory of gambling and underlying assets.
Prediction markets fail virtually every test of the paper’s framework. They fail to widen the knowledge base, generate knowledge spillovers, or raise total productivity. In the Nobel-winning model, productive innovation raises the technological benchmark, enabling further innovation. Innovation that merely “steals business” without advancing the frontier is, according to that model, socially wasteful.
Prediction markets do not raise the technology level in any sector; instead, they redistribute existing wealth. Activities that merely redistribute money, create regulatory arbitrage, or extract value without improving productive efficiency do not contribute to growth. Prediction market trading does not change the ratio of output to inputs in any productive sector, which would benefit overall society.
In addition, unlike equities or bonds, prediction market contracts do not generate cash flows, dividends, or fund productive investment. Research on Kalshi indicates that average users lose 20% before fees, with “takers” losing approximately 32% on average.
This is why the percentage of losing traders is so drastic on prediction market platforms. There is no value for the trader to latch onto except their own intelligence, leaving them with long odds in the face of surplus economic factors and insider traders.
What Do We Do With Prediction Markets?
People are sitting on the sidelines because they cannot play the game. The only solution is to give them more opportunities to play. This always takes the form of creating private companies that drive growth and benefit all, either through direct participation or indirectly through a rising tide.
Prediction markets are not so much the driver of evil as the symptom of a much deeper problem. Americans no longer want to bet on America. If we do not solve that problem first, more and more Americans will buy out of the system through increasingly troubling means. The good news is that we do not need a new blueprint. In a letter to shareholders in 2021, Warren Buffett explained it in simple terms.
“There has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”
