The Future of Futures: On Kalshi and Prediction Markets

“MORALLY REPUGNANT and grotesque,” “wasteful and absurd”—Senators Ron Wyden and Byron L. Dorgan did not mince words. They urged their colleagues on the senate floor to reject the Pentagon’s proposed futures market on terror attacks.

That was 2003. The Pentagon had suggested allowing traders to place bets on the likelihood of a bomb detonating outside a market in Kabul, for example, or a bioterror attack occurring in Tel Aviv. In a statement, the Defense Department scrambled to justify the project: “Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information. […] Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions.” No one on Capitol Hill was convinced, and the Pentagon scrapped the initiative.

Seventeen years later, a different federal agency, the Commodity Futures Trading Commission (CFTC), weighed whether to grant approval to Kalshi, a venture-capital-backed online marketplace that provides its users the opportunity to trade directly on the outcomes of specified events. On Kalshi’s platform, anyone with a Social Security number and cash to spare could use the “event contract,” a brand new financial instrument, to wager on the future. The CFTC decided in Kalshi’s favor, and in November 2022, Kalshi launched its platform with the blessing of the United States’ top futures regulator—the first federally regulated exchange to permit trading on event contracts.

Kalshi’s marketplaces run the thematic gamut from economics and politics to entertainment, culture, public health, and transportation. Terror attacks are off-limits, but traders may buy and sell shares of predictions on whether the US debt ceiling will be raised by a certain date, wager on the number of major hurricanes that will form over the Atlantic in the coming year, place bets on China’s GDP growth rate, or speculate on which film might win the 2023 Academy Award for Best Picture.

CEO and co-founder Tarek Mansour has argued that Kalshi’s CFTC approval marks “a paradigm shift for financial markets.” The platform’s website presents event contracts (the “future of futures”) as “the next evolution of regulated commodities,” and as “an asset class that meets the demands of today’s information economy.” Drawing on familiar tropes about the democratization of finance, the company credits itself with having unlocked “general events trading for all.” Less like a planning board and more like a Ouija board, Kalshi’s marketplace aggregates the wisdom of crowds to “control the chaos” and “forecast the future.” The company’s mission statement is unambiguous: “[M]ake the uncertain more certain.”

Helmed by MIT-trained founders armed with dazzling résumés and backed by heavyweight Silicon Valley venture capital funds, the start-up entices users with a seductive proposition: “Stocks are imperfect trading tools because they’re influenced by many factors. Filter out the noise and trade events on your terms. Use your knowledge and street smarts to make trades on a level playing field. Profit from your convictions and increase your financial stability.”

Kalshi traffics in popular ideas about the spontaneous genius of markets. “Kalshi markets are a way to get a glimpse into the future”—an echo of the Department of Defense’s terror market apologia—is stamped on the start-up’s home page. The business press is unsure what to make of the platform. A recent Bloomberg article wavered—Kalshi was as likely to inaugurate an “era of market-based enlightenment,” the authors guessed, as it was to “push Wall Street’s most destructive tendencies even further into the real world.” But Kalshi’s conjurers, the “street smart” spawn of the defense laboratory and the trading floor, owe as much to Washington as they do to Wall Street. To glimpse the future that Kalshi hastens, we must situate the buzzy start-up and its signature product offering within the context of converging logics of financialization, risk management, and international security. Kalshi, a betting platform bearing a major regulatory agency’s stamp of approval, realizes a tendency native to US halls of power: prediction markets conceived of as privileged sites of knowledge production.

 

Futures Past and Present

Forms of forward-looking contractual insurance have adapted to cover any class of risk since at least the time of the Babylonians. In the sixth century BCE, the Greek philosopher Thales trafficked in derivatives based on the future price of olives yet to be harvested. Puts (an option to sell a stock at a specific price by a specific date) and “refusals” (calls, or the option to buy a stock in a similar fashion) became well-known trading instruments in London in the 1690s. The Tokugawa shogunate established the Dojima Rice Exchange in Osaka in the early 18th century for the purpose of trading in “futures” of the essential grain. In New York City before and during the Civil War, markets existed to facilitate trade in anticipated deliveries of cotton.

Beginning with the listing of “exchange traded” forward contracts by the Chicago Board of Trade in the 1860s, commodity futures emerged in the United States as hedging tools to protect market participants from unpredictable price volatility (think of the practice of buying contracts related to the future price of grain, for instance, to protect against weather-related crop shortages). At the same time, “bucket shops”—informal venues for gambling on commodity prices listed at organized exchanges—exploded in popularity, although a circuit court outlawed the practice in 1905 on the grounds that speculative profiteering was “unnatural,” “evil,” and “deranged.”

The wheels of financial innovation kept on turning. In the early 20th century, traders outside the New York Stock Exchange could dabble in the “Curb Market,” an alternative marketplace (similar to bucket shops) for speculating on stocks, bonds, and politics. In 1972, the Chicago Mercantile Exchange launched the world’s first “financial futures” marketplace, enabling traders to use instruments like liability swaps to mitigate exposure to currency and interest rate risks. Today, one may trade in “cryptocurrency inverse futures” and “perpetual futures.” Some economists advocate futures markets for transplant organs, so-called “organ futures.”

A timeline on Kalshi’s home page narrates this history, beginning with grain futures, which evolve to become commodities futures and then interest rate swaps, culminating in event contracts, the next evolution of regulated commodities: “The future of futures.” So, what is this new class of assets? How does a marketplace for these instruments work?

Kalshi runs an “all or nothing” binary options chain marketplace. Event contracts are structured around yes-or-no questions about future events. In a market based on the anticipated value of the S&P 500 by 1:00 p.m. PST on December 29, 2023, for example, at the time of writing, there are 15 different investible contracts to choose from. Contracts reflect the probabilistic convictions of traders—or, put differently, demand for the “Yes” or “No” side of each contract. If a trader thinks the S&P will close within the range of 3,500 to 3,699.99 at the time of market resolution, they can choose to buy shares in the “Yes” side of that contract, at which point they enter into the trade with another user on the platform looking to purchase the opposite side.

Kalshi’s marketplace harnesses the age-old price discovery mechanism: buyers and sellers arrive at transaction prices for specific contracts at a given time based on all available information. What sets event contracts apart is that, unlike other futures, prices for these instruments do not signal the expected value of an underlying deliverable asset, tangible (commodities) or intangible (financial assets). Rather, the imminent resolution of the event itself constitutes the “underlying” value of each contract in the market.

Yet an event—a thing that happens—cannot be delivered to a terminal buyer. Kalshi has achieved something remarkable. It has acquired the legal authority to impute financial value to demarcated space-time, the final frontier for capitalist growth: spatiotemporality as such. On Kalshi’s platform, all things that may or may not happen are liable to melt into air—or, rather, into money, which is the only thing the company ultimately promises to deliver. In the resolution of contingencies, traders find an inexhaustible source of exchange value (Kalshi means “everything” in Arabic). Kalshi gives the notion of “speculation as a mode of production” a whole new meaning. With event contracts, the mere passage of time finds expression in the commodity form, for future uncertainty is never in short supply.

The firm suggests that event contracts allow people to “hedge and mitigate everyday risks,” meeting the “demands of today’s information economy.” It is true that a sophisticated trader might buy event contracts related to, say, a major hurricane in an effort to hedge against the risks posed to the traders’ investments in real estate. And event contracts do achieve a unique kind of parsimony, allowing traders to bypass “imperfect trading tools” like stocks (or proxies for stocks like indices) and wager directly on real-world events.

But one cannot help but notice that Kalshi’s marketplace maximizes investors’ exposure to risk; the firm goes out searching for uncertainty to securitize and chaos to monetize. Borrowing from the political scientist Rob Aitken, Kalshi engages in “a kind of management of uncertainty through which future risks are commodified,” which results in “the remaking of uncertainty as a kind of financialized asset stream.”

Scholars have long recognized the self-sustaining properties of synthetic derivatives. “Derivatives emerge out of the perceived need to protect against the risks involved in complex speculative financial transactions,” critical theorist Jodi Dean reminds us, “even as they make these transactions possible and thereby produce, retroactively, their own conditions of emergence.” The same is true of Kalshi’s product; event contracts produce their own conditions of emergence.

But demand for event contracts does not arise from the need to protect one’s investment in a product. It arises from the need to protect oneself against “everyday risks.” In a paranoid but self-assured style, traders seek indemnification at every turn. By securing positions in event contracts, the desire to secure one’s private life against fate is sublimated into the domain of actuarial risk management.

In this regard, event contracts are profoundly different from grain futures and currency swaps. Kalshi engages in the management of unease, a certain high-modernist anxiety associated with living in a “risk society,” one that, according to the sociologist Anthony Giddens, is “increasingly preoccupied with the future (and also with safety), which generates the notion of risk.” At the zeitgeist level, event contracts represent some kind of final triumph of economics over politics—not an evolution, but perhaps the final revolution, in derivative financialization. A far cry from Japan’s 19th-century rice brokers, Kalshi traders are Nietzsche’s “last man” at the end of history, striving for “security, lack of danger, comfort.” With one caveat: The price of certainty, Kalshi’s founders insist, is exposure to risk.

 

Prediction Markets: The Wisdom of Crowds

We might better situate Kalshi in the history of prediction markets. Wagering on matters of civic intrigue in Italian city-states, such as papal appointments, was considered “an old practice” as early as 1503. In the 1770s, Charles James Fox, the Whig statesman, “betted frequently, largely, and judiciously, on the social and political occurrences of the time” (on the passage of the Tea Act, for example). The historian John Robin Robertson notes a popular motto among patrician Englishmen in the Victorian era: “Bet or be silent.”

Markets for political speculation have been a regular feature of American life since the earliest days of the republic. More than six million dollars (180 million in 2010 dollars) reportedly changed hands in New York over the 1844 presidential election between Henry Clay and James Polk. These practices eventually drew the ire of lawmakers. In 1845, New York Governor Silas Wright decried “the extensive and rapidly increasing practice of betting upon elections, and the interested and selfish, and corrupting tendencies which it exerts upon the election itself.”

Until the early 20th century, crowds were largely recognized for their madness, not their wisdom. In 1886, Nietzsche wrote that “[m]adness is rare in individuals—but in groups, parties, nations, and ages it is the rule.” Charles McKay’s popular 1841 study Extraordinary Popular Delusions and the Wisdom of Crowds argued that men “go mad in herds, while they only recover their senses slowly, and one by one.” But in 1907, the statistician Francis Galton claimed to have discovered the opposite by measuring the collective judgment of a group of visitors to a country fair, tasked with estimating the weight of an ox. In the late 1960s, statisticians took up the mantle of Galtonian “many minds” theory and set about demonstrating that groups outperform individuals in forecasting contests. James Surowiecki’s 2004 bestseller The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations represented the contemporary triumph of these ideas in the popular imagination.

In the early digital era, prediction markets went live. The Iowa Electronic Markets, set up by faculty at the University of Iowa before the 1988 US presidential elections, was cited as evidence that “prediction markets can work” by the Harvard Law Review in 2009. Today, there are many such platforms, but hardly any enjoy the regulatory status and commercial largesse that Kalshi does. PredictIt continues to endure strong regulatory headwinds. In 2022, CME Group launched a marketplace that seems similar to Kalshi’s. Polymarket promises to become the premier cryptocurrency-based prediction market. After settling a CFTC probe in January 2022, the company enticed the “CryptoDad” and former lead regulator on the CFTC during the Trump administration, J. Christopher Giancarlo, to sit on its advisory board. Finally, established projects like Good Judgment—a spinoff of the Aggregative Contingent Estimation (ACE) program of the Intelligence Advanced Research Projects Activity (IARPA), helmed by the godfather of probabilistic forecasting, Philip Tetlock—offer semicommercial “Superforecasting” services.

 

The American Exception

In the sweep of the history of prediction markets, Kalshi is odd, but it is not without antecedents. Kalshi cops its operative logic from mid-20th-century free-marketeers, and the platform’s corporate ethos is indebted to broader developments in the postwar American social sciences and an intellectual transformation that occurred inside the US intelligence establishment at the dawn of the Cold War.

In the mid-20th century, American defense wonks enshrined probabilistic forecasting as an instrument of strategic planning. In the 1950s, the RAND Corporation developed the “Delphi method,” a technique for aggregating expert foreign policy, military intelligence, and national security analysis. The nuclear revolution prompted the intelligence community to develop methods for assessing the likelihood of “imagined futures,” many of which involved thermonuclear holocaust. “No other characteristic of decision-making is as pervasive as uncertainty,” RAND’s top economist remarked in the 1960s. As a consummate “site of early-Cold War knowledge production,” RAND set out to make the uncertain more certain.

Thinking within the US foreign policy establishment dovetailed with developments in the study of economics and finance. In the 1950s, scholars began to apply cognitive models of decision-making under conditions of uncertainty to economic models of rational behavior. With the behavioral revolution in finance of the late 1970s, economic theorists began to stress the psychological forces that shape market dynamics and inform probabilistic risk assessments.

In the early 2000s, practitioners in the field of “experimental economics” returned to a thesis developed by Austrian economist Friedrich Hayek in the 1940s. Hayek argued that knowledge in society was sufficiently diffuse to render central planning hopeless, and that markets were thus necessary to coordinate and economize the unique bits of information in every person’s possession. To test the “Hayek hypothesis,” the economist’s acolytes at Caltech, George Mason University, and the University of Chicago led experiments with human subjects (so-called “flesh and blood markets”). For his efforts, the American experimental economist Vernon Smith shared the Nobel Prize in Economic Sciences with Daniel Kahneman in 2002. In a speech before the Austrian Parliament, Smith emphasized that “the problem of society is how to utilize human knowledge when it is not, and cannot ever, be given to anyone in its totality.” Smith and his colleagues perceived a solution in flesh and blood prediction markets.

Prediction markets had escaped the confines of the defense research laboratory, but they remained bound up in matters of international security. Although the Department of Defense’s 2003 initiative to press-gang the wisdom of crowds into the War on Terror met harsh resistance (today, the domain that the Pentagon created to host its terror market is an “online resource for casino gamers”), the logic and the promise of prediction markets had a profound impact on US foreign policy in the immediate post-9/11 period.

With its 2002 National Security Strategy, the George W. Bush administration pledged, as historian Melvyn Leffler put it, to “take action to preclude not only imminent threats but also gathering ones.” The will-to-predict at the heart of the Bush Doctrine spelled the triumph of an increasingly probabilistic view of the future and the imminent and asymmetric risks it holds. For some theorists, the Bush Doctrine courted a wholesale epistemological transformation: the emergence of “anticipatory reason,” a distinct habitus that renders the future as “not a temporal zone of events to come […] but an indefinite source of contingency and speculation,” an “unfalsifiable and inexhaustible source of justifications for securitization” that serves “as a locus of [power and] strategy.”

In the same vein, political and legal theorists have argued that an “actuarial paradigm,” evident in various professional practices, gained traction during this period: a “probabilistic episteme,” according to Bernard Harcourt, “that emphasizes aggregation, probabilities, and risk calculation.” These attitudes gained legitimacy on the basis of technological advancements in artificial intelligence and machine learning—technologies endowed with remarkable predictive capacities. The digital revolution transformed a rhetorical defense posture into an operational reality.

Over the course of two centuries, the humble bucket shop rose in the esteem of the US government, from “unnatural,” “evil,” and “deranged” to an indispensable forecasting tool. Transformations, both psychic and strategic, accompanied its rise. Reflecting on the consequences of the first total war, Ernst Jünger wrote that World War I permitted the “unlimited marshaling of potential energies, which transform[ed] the warring industrial countries into volcanic forges.” A century later, in the context of the US-led unipolar world order, the War on Terror permitted the unlimited conjuring (and annihilation) of potential threats, as political theorist Brian Massumi has argued. This doctrine of preemption, researcher Vasja Badalič explains in a recap of Massumi’s work, brought to bear “a new operative logic of power that defined our political epoch.”

Kalshi is a terminal manifestation of these developments in the financial sphere. The firm capitalizes on a boundless horizon of what Secretary of Defense Donald Rumsfeld famously termed “known unknowns”: events that we fear may come to pass. Traffic on the platform militates against “unknown unknowns,” which are more terrifying still since they are events we did not know we needed to fear.

Kalshi holds a mirror up to the paranoia. “Protect against world events that impact you most” is written on the home page of the start-up’s website (which close to 12,000 users visited in February to trade on “Oscars Best Adapted Screenplay”). The oblique logics of security and finance converge on Kalshi’s marketplace. In international relations theory, securitization occurs when states discursively cast events (e.g., “Islamic terror”) as security threats, magnifying the real threat the events pose to their populations. In finance, securitization occurs when issuers repackage and transform assets into tradable, marketable, financial instruments (e.g., mortgage-backed securities). In a nation that grants regulatory approval to traded event contracts, securitization is a cheeky double entendre.

American security fetishists bear responsibility for two of our era’s major catastrophes. The first was the Bush administration’s 2003 invasion of Iraq. The second was the 2008 Global Financial Crisis, triggered by the collapse of subprime-mortgage-backed securities. In the aftermath of the crisis, the federal government passed the Dodd–Frank Act. The morning President Obama signed the bill into law, he announced that it was past time to “rein in the abuse and excess that nearly brought down our financial system.” He added that the legislation would “finally bring transparency to the kinds of complex and risky transactions that helped trigger the financial crisis.”

The same piece of legislation serves as the basis of Kalshi’s contract market designation. In 2020, CFTC regulators cited a Dodd–Frank amendment to the Commodity Exchange Act to ensure that Kalshi received approval. Now, citing the same clause, they are pushing for the United States to permit “political control contracts”—Kalshi-traded derivatives to wager on election results, the taboo frontier for prediction markets. The basis of their argument is 7 U.S. Code § 5, which reads in part: “It is the purpose of this chapter […] to promote responsible innovation and fair competition among boards of trade, other markets and market participants.”

The operative term here is “responsible innovation.” An alliance of speculators and regulators has rallied under the banner of responsible innovation to increase Kalshi’s trade volume, raise capital for the platform, and facilitate betting on election outcomes. Nobel Laureate Robert Shiller and Jason Furman, a Harvard professor and President Obama’s chair of the Council of Economic Advisors, have also voiced support for political event contracts. The clearest statement of Kalshi’s aims may be a short piece published on its website in October 2022, titled “CFTC Decision on Election Markets Will be a Responsible Innovation Indicator.” Its opening lines evoke 2008 and the essential role that speculators play in creating stability. “Every crisis,” the piece begins, “has its response.” Kalshi’s founders have given financial engineers their blessing to speculate their way out of any crises they speculate themselves into. Today, the US government—which melts a durable alloy of the Protestant work ethic and Mark Zuckerberg’s diktat “move fast and break things”—permits traders to justify risk-taking using the language of responsibility.

Kalshi’s lead regulatory strategist is Jeff Bandman, formerly a senior official at the CFTC. Bandman joined the CFTC as special counsel to the chairman in 2014, served for two years as the CFTC’s head of clearing and risk, then served for 18 months as fintech advisor to the Republican chairman, CryptoDad J. Christopher Giancarlo. In his role as Chairman Giancarlo’s fintech advisor, Bandman launched “LabCFTC,” an initiative charged with “promot[ing] the use of technology” and facilitating “responsible innovation” in US markets. Brian Quintez, a former CFTC commissioner, sits on Kalshi’s board of directors. Quintez (another innovator) was a commissioner at the time that the CFTC approved trading on event contracts. And a current CFTC commissioner, Caroline Pham, faces an official ethics complaint for colluding with Kalshi’s strategy team to shield the company from oversight, citing the “extraordinary, if not unprecedented, public disclosure of highly confidential, nonpublic, internal, factual and legal discussions by CFTC Commissioner […] concerning Kalshi’s pending application.”

In May 2023, facing legal scrutiny, Kalshi withdrew its election-betting contracts application. The Wall Street Journal reported that insiders expected the company “to revise its application and resubmit with changes designed to help it win approval.” According to the report, the startup “and its backers say that [event contracts] would be safer for users than foreign venues for election betting, and that they would produce useful information for political scientists.” In June 2023, Kalshi submitted a revised proposal that relaxed limits on election wagers. If the CFTC approves Kalshi’s new proposal, the platform will allow firms with a “demonstrated established economic hedging need” to place $100 million bets on election outcomes.

Kalshi’s cozy relationship with the United States’ top derivatives regulator raises concerns about how regulatory agencies view their responsibilities, after Dodd–Frank, to manage risk and regulate private markets. These concerns are all the more relevant in the wake of recent regional banking crises and widespread fraud in the crypto markets.

But there is nothing extraordinary about the CFTC’s attitude. With bank closures and wire fraud dominating the headlines, who wouldn’t want to hedge? Every crisis has its response. “The world is increasingly volatile,” Kalshi’s website recently read. “Protect yourself and your business against all the unforeseen effects of real-world events.” It would be irresponsible not to.

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Addis Goldman is a writer based in New York. His writing has appeared in Artforum and Lapham’s Quarterly, among other publications.

Max Hancock is a writer and researcher based in Cambridge, Massachusetts.

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Featured image: Alexander Drewin, Suprematism (formerly) Abstraction, 1921. Yale University Art Gallery, Gift of Collection Société Anonyme. Photo: Yale University Art Gallery. artgallery.yale.edu, CC0. Accessed July 6, 2023.