Kalshi billionaires & the "predictions market"

As fans of open markets, generally speaking, what do we make of the soi-disant "predictions market"? in which the firm Kalshi has made paper billionaires out of its youthful founders (one of which is the youngest ever female paper billionaire).

Well, first of all, good luck to them: I assume their investors are consenting adults, hopefully with a brain cell or two to rub together.  Investment bubbles help make the world go around: where would we be for railways if there hadn't been an "irrationally exuberant" railway-mania boom in the 19th C?  Just so long as it is private cash, hopefully not pension money, that someone can afford to lose 

But secondly, this is just a slightly exotic betting platform with good PR, right?  And will they ultimately prove correct in that it's possible to "monetise every difference of opinion"?

A story.  At the back end of the 1990s when Enron had triumphantly succeeded (against strenuous opposition) in becoming a highly profitable market maker in all manner of commodity contracts that nobody except them thought was remotely possible - indeed, some academics declared was a priori impossible - a lot of people in the energy sector and much-larger financial / insurance sector were looking for the Next Big Thing to commoditise, create derivatives on, and trade.  I could tell you an amusing but irrelevant story about the attempt to do this with water: and at the time Enron went bust (2001) it had a clever plan, never realised, for doing it with property prices.  But the one that's relevant here is weather derivatives.

It's clear enough that a great number of companies and individuals often have something of value to them that is riding on what the weather will be.  Ice cream manufacturers, energy companies, holiday concerns both buyers and sellers, brides-to-be, county fairs etc etc.  They often buy insurance, from long-established specialist insurers.  So what?

Well, in principle we can identify all the technical factors required to establish financial derivatives.  Financial issues at stake in very large measure, impacting on a huge plurality of players.  Gains and losses related directly to uncertain but measurable outcomes.  Data on said outcomes that are objective and not open to manipulation or influence by the prospective winners & losers.[1]  So the weather-related derivative products were devised and a very large number of players from several sectors piled in with traders, marketing teams, software, complex stochastic analyses etc etc - all the paraphernalia of traded markets.  All these costly resources created, they sat back and started trading - mostly with themselves.  but surely, the genuine "natural counterparties" / end-users (entities with something at stake), the 'locals', the outright punters, would come along in due course?  What's critical in any such market is transparency (easy), clearing & systems, but above all else, LIQUIDITY.  

Well, nope: despite this huge global investment the weather derivatives market market never took off on anything remotely like the predicted and expensively planned-for scale.[2]  Why?  Because no bugger has any view whatsoever on what the rain is going to do next August 13th at noon, in any regions other than the Sahara or Antarctica (where there's no end-user business to be had).  Not even inveterate gamblers of the Sky Masterson variety.  Somebody may well have a horrible exposure to rain at that precise time, but no broker or market maker will be able to find anyone willing to take the other side of the bet - when there's a perfectly good insurance-based alternative.  (For those interested in the technicalities of financial risk management, insurance is a completely different paradigm to hedging, with different applicability.)

Why is this different to, say, the price of oil on August 13 next year?  Because there are very large numbers - sufficient numbers! - of people willing to take the other side of almost any number you care to put out there.  If I say $50/bbl, there will be loads of people with theories that say it'll be less, and loads who'll say it will be more.  The proof of this is the liquidity of the forward market for oil.  And any number of other commodities, as well as financial variables altogether more abstract.  Ditto big sporting events.

But weather?  Nah - or so it turns out.  Could this have been foreseen?  Some folks did, and saved themselves a bunch of time, money and effort.  But no so many.  Meanwhile, the perfectly healthy weather insurance market continues on its merry way.

So: a market in differences of opinion?  Well, sports and political betting are well known to be ultra-fertile ground for these things[3].  But if Kalshi is to break into new territory, it seems to me it needs to think of something a bit more interesting than "Will Trump attend another UFC event this year?" - and a heap less open to, *ahem*, manipulation.   (Guess who might be taking the other side of that bet?!  I think we can fairly be blunter: that kind of thing is really, really crass.)  

Nobody can rule out Kalshi actually finding a rich new seam of prospective punting.  But (a) this is a crowded field, and (b) it won't be hard for a load of other players to pile all over it.

Did I say "paper billionaires"?  They'd better try to cash out PDQ - as regards young(ish) female billionaires, I suspect Taylor Swift is the more solvent ...

ND

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[1] I am not interested in entertaining conspiracy theories about how weather data is systematically manipulated  by the Deep State or the Green Blob or whatever.  Obviously, forecasts are forecasts, and weather forecasts are substantially better than forecasts of commodity price & other financial variables forecasts which are seriously manipulated by vested interest all the time. 

[2]  Some AI disputes the notion that it never took off, suggesting it's a $25bn market.  That's derisory.

[3]  Is it unkind to laugh at Alasdair Campbell's son's sure-fire sports-betting syndicate?