Prediction Markets
Prediction markets can provide useful information, help hedge specific risks, and support certain disciplined investment strategies. But those legitimate applications do not make them a suitable investment vehicle for most individuals.
Will the Federal Reserve cut interest rates? Who will win the next election? Which team will take home the championship?
You probably have opinions about at least one of those questions. Prediction markets let you put money behind them, buying and selling contracts whose payouts depend on what happens. They combine three powerful attractions: following the news, testing your judgment, and potentially making money. Suddenly, being right can deliver more than bragging rights.
But does putting money behind a prediction make it an investment?
At Cabot, we believe prediction markets deserve a thoughtful answer. They can provide useful information, help businesses and investors hedge certain risks, and create opportunities for specialized trading strategies. The technology has legitimate applications.
Even so, we do not recommend prediction markets as an investment vehicle for most individuals. Building wealth requires a repeatable process, sensible risk management, and a clear understanding of what drives your returns. Having a strong opinion does not establish an advantage over other traders.
If you enjoy putting a little money on an outcome, that is your choice.
Our suggestion: Treat the money you risk as the admission price to “a show”—an entertainment expense you can afford to lose, and any winnings are a welcome bonus.
What Are Prediction Markets?
A prediction market is a marketplace where people buy and sell contracts whose payouts depend on specific events. Instead of buying a share of a company, you take a financial position on the answer to a question.
The most common format offers two choices: yes or no. A winning contract typically pays $1 when the outcome becomes official. A losing contract pays nothing. Other formats allow several possible outcomes or different payout amounts.
For example, consider a contract asking whether a city’s temperature will reach 90 degrees tomorrow. If you buy “yes” for 60 cents and the temperature meets the contract’s terms, you receive $1—a 40-cent profit before fees. If it does not, you lose your 60 cents.
Questions can cover inflation reports, elections, sports championships, global geopolitics, rainfall, or entertainment awards. The appeal is easy to understand: You can turn your knowledge—or simply a strong opinion—into a chance to make money.
Prices change as participants respond to new information. A weather forecast, economic report, or player injury may shift what traders will pay. You may also be able to sell before the event ends, taking a profit or accepting a loss. That depends on finding a buyer at a price you will accept.
Kalshi and Polymarket are recognizable names in this field, and their advertising can be hard to avoid at times. But readers should examine each platform separately: how it operates, which rules apply, how it decides outcomes, and what protections users have.
The screens may look like a brokerage account, complete with charts, changing prices, and buy-and-sell buttons. That familiar appearance can blur an important distinction.
Financial language and an exchange interface do not establish an investment purpose.
To judge the transaction, ask what you are buying, why you expect to profit, and what role it serves in your financial life.
How a Prediction Becomes a Profit—or a Loss
Suppose you see this question on a prediction market: “Will the Fed cut its target rate at its next scheduled meeting?”
You expect a cut, so you buy 100 “yes” contracts at 40 cents each. Your total cost is $40, before fees. Each contract pays $1 if the outcome meets the stated terms and nothing if it does not.
| Item | Hypothetical Result |
| Initial cost, before fees | $40 |
| Payout if the condition is met | $100 |
| Profit if correct, before fees | $60 |
| Loss if incorrect, before fees | $40 |
The $100 payout includes your original $40, so your profit is $60, not $100.
A 40-cent price roughly suggests that traders assign a 40% chance to a rate cut. But that figure reflects the market’s pricing, not a proven likelihood. Fees, limited trading, and differences between buying and selling prices can affect the signal.
To buy, you submit an order. You might accept an available seller’s price or set the highest price you will pay and wait. The price displayed on your screen may reflect an earlier trade rather than what someone will accept now.
You may also sell before the Fed meets. If new economic data makes a cut seem more likely, buyers might offer 65 cents per contract. Selling all 100 at that price would bring in $65, producing a $25 profit before fees. But you need buyers willing to purchase all your contracts at that price. An early exit is not guaranteed.
Trading costs matter, too. The bid-ask spread is the gap between what buyers offer and sellers request. Crossing that gap, along with paying fees, reduces your return.
Finally, read the contract’s exact terms. Which meeting counts? What qualifies as a cut? Which official source determines the answer? Settlement follows those rules, even if you interpret the headline differently.
The key lesson: Picking the likely outcome is not enough. The price must offer favorable odds compared with the event’s actual chance of happening—which you can only estimate.
Consider what happens when you buy at 90 cents. You risk 90 cents to make just 10 cents. Across 10 identical purchases, nine wins earn 90 cents, while one loss costs 90 cents. You break even before fees and lose money after them.
You were right 90% of the time. You still did not make a profit.
Useful Forecasts Do Not Automatically Mean Good Investments
The strongest argument for prediction markets is that they bring together information from people willing to risk money on their judgment. Someone who spots a misleading headline or studies overlooked data has a reason to act. Their trades can help prices reflect new information.
Observers can then watch those prices to track changing expectations. The Commodity Futures Trading Commission (CFTC) recognizes that prediction markets can support forecasting and help users hedge, or offset, certain financial risks.
But putting money behind an opinion does not make it well-informed. Traders can share the same biases, repeat the same rumors, or react to the same faulty report. Ten thousand people following one bad source do not create ten thousand independent judgments.
Trading activity matters, too. In a thin market with few buyers and sellers, relatively small orders can move prices sharply. And a prediction market is not a representative public survey. Its prices reflect the people who participate, the money they commit, and the trades they choose to make.
Even a sound forecast leaves room for surprise. An event priced as having an 80% chance should still fail about one time in five across many comparable forecasts. One unexpected result does not prove the original estimate was unreasonable. Probability describes uncertainty; it does not erase it.
You can learn from the forecast without buying a contract.
For investors, the practical benefit may come from watching rather than trading. Prediction markets can add another perspective alongside economic data, company research, and other evidence.
The Insider Trading Problem
What if the person on the other side already knows the answer—or can influence it?
That question raises one of the biggest concerns about prediction markets. You might spend hours weighing the odds while another trader has access to facts you cannot obtain.
Still, not every advantage amounts to insider trading. Three situations deserve separate treatment.
| Situation | Why the Distinction Matters |
| Superior analysis of public information | Research and expertise can create a legitimate advantage. |
| Misuse of confidential information | Trading may violate the law, duties to keep information private, or exchange rules. |
| Ability to influence the outcome | Creates conflicts and risks of manipulation; exchange rules may prohibit trading. |
A weather expert who finds a pattern in public data may have earned an edge through skill. A video editor who knows what an unpublished video contains has a different kind of advantage. A campaign employee or a public official may know an announcement is coming. And someone taking part in an event may help determine the very outcome people are trading.
These concerns are more than hypothetical.
In February 2026, the CFTC described two disciplinary cases handled by Kalshi. One involved a political candidate trading on his own candidacy, against exchange rules. The other involved a video editor trading contracts tied to a YouTube channel whose content he likely knew before publication. Kalshi imposed financial penalties and trading suspensions.
These were exchange disciplinary actions, not announcements of criminal convictions. The CFTC explained that the conduct could also involve federal violations, including misuse of confidential information obtained through a position of trust.
Supporters of informed trading make a reasonable point: People with better information can push market prices toward more accurate forecasts. If someone knows an event is likely, their buying may help the price reflect that knowledge sooner.
But a better forecast does not settle every concern. Was confidential information used improperly? Did someone break a duty to an employer? Could a participant profit by changing the outcome? A price can become more accurate through conduct that still violates rules or undermines trust.
Legal obligations and platform rules also require separate review. An exchange may prohibit conduct beyond what federal law bars. Neither “all informational advantages are illegal” nor “anything goes in prediction markets” gives an accurate picture.
For an ordinary participant, the lesson is practical: Following the news closely does not ensure equal footing with everyone else trading. You may be judging what could happen while someone else already knows what will happen. Before assuming you have an edge, consider who might have a much stronger one.
When Prediction Markets Can Serve an Investment Purpose
Some uses of prediction markets serve a clear financial purpose. But they require more than an interest in current events or confidence in a prediction.
Hedging an existing exposure.
A grower might buy a contract that pays if temperatures fall below a stated level. If a freeze damages the crop, the payout could offset some losses. The goal is to reduce risk across the business and the contract together. The protection may be imperfect: The contract’s weather station, temperature threshold, or dates might not match the grower’s actual losses. The CFTC recognizes weather contracts as a possible hedging tool.
A losing contract does not necessarily mean a failed hedge. If the freeze never comes, the contract may expire worthless while the crop escapes damage. The grower paid for protection against a loss that did not occur.
Disciplined trading based on valuation.
A specialist might study public information, build probability models, and seek contracts priced below their estimated value. This is a speculative investment strategy. It requires evidence of a repeatable advantage after fees and other costs, along with limits on how much to risk.
Arbitrage or market making.
Experienced traders may seek price differences between comparable contracts or earn the spread between buying and selling prices by providing liquidity. These approaches require skill and careful execution. Differences in settlement rules, failed trades, and platform problems can turn an apparent opportunity into a loss.
Same Contract, Different Purpose
Consider a contract that pays if a specified location records freezing temperatures.
| Participant | Reason for Buying |
| Business hedger | Offset possible crop losses. |
| Professional trader | Buy at a price below estimated value. |
| Recreational participant | Add excitement to following the forecast. |
The contract alone does not tell you its purpose. A hedge aims to reduce an existing risk. A standalone trade aims to earn a return. Neither purpose guarantees success, and professional applications do not make these markets suitable for every investor.
Why Cabot Does Not Recommend Them as an Investment Vehicle
For most individual investors, prediction markets should not be part of your wealth-building plan.
The main reason comes down to what you own and what drives your return. A stock gives you a share of a business that can grow, earn profits, and pay dividends. A bond generally promises interest payments and repayment of principal, subject to the borrower’s ability to pay. An event contract offers a payout if a stated condition occurs. It gives you no ownership in an underlying business.
The math also deserves attention. In a matched, fully funded binary contract, the two sides together fund a fixed payout. One participant’s gain comes from another’s loss. Across participants, trading profits and losses offset before costs. Fees reduce what remains. Unlike shareholders collectively benefiting from a company’s growth, these traders divide a fixed pot.
That does not make profitable trading impossible. It does mean you need a repeatable advantage after costs. A few correct predictions cannot establish that advantage. Even a winning streak may reflect luck, and early success can encourage larger positions just before an expensive mistake.
Other risks complicate the picture. You may struggle to sell when you want to exit. Contract wording can lead to disputes over which outcome qualifies for payment. Other participants may have better information. Platform failures or problems accessing funds can create losses beyond a mistaken forecast. Clear contract terms, trading rules, and customer protections therefore matter.
We are not suggesting that every derivative is inappropriate or that buying stocks always counts as sound investing. Derivatives can help manage risk. Stocks can become vehicles for reckless speculation. The important questions concern the transaction’s purpose, its expected return, and its place in your investing plan.
Cabot’s approach gives investors a more durable foundation: research the business, consider its valuation, diversify, keep position sizes sensible, and allow time for business growth to support returns.
That process still involves uncertainty and losses. But it connects your financial progress to productive activity and a disciplined strategy—something a series of bets on tomorrow’s headlines does not provide.
If You Enjoy the Show, Set an Admission Price
A small wager can make an election, championship game, or economic announcement fun and more engaging. If you enjoy that experience, spending a limited amount on it is a personal entertainment choice.
Start by deciding what the entertainment is worth to you. Set a fixed budget for a defined period, such as a month, and assume you could lose every dollar. Count every deposit toward that limit. Five $20 deposits still add up to $100, even if each feels small.
Keep retirement savings, emergency reserves, and borrowed money out of the activity. If you reach your limit, stop until the next budget period. Do not raise the limit to win back losses. The price of yesterday’s entertainment should not determine what you spend tomorrow.
Treat the money you put at risk as the admission price to the show.
Any winnings are a bonus, not part of your financial plan.
Conclusion: Know What You Are Buying
Prediction markets can provide useful forecasts and support legitimate financial strategies. Neither benefit makes them a recommended investment vehicle for most individual investors.
You can follow the forecasts without making a trade. You can build wealth through research, diversification, and a disciplined investment plan. And if a small wager adds enjoyment to following an event, you can choose to pay for that entertainment within a firm budget.
What matters is understanding which purpose your money serves.
If you choose to join the show, decide what admission is worth to you before you enter and potentially get caught up in the emotion—and do not confuse the ticket with an investment in your future.