Profiting From Prediction

Prediction markets transform uncertain events into profit-making opportunities. By allowing platform users to buy and sell event contracts tied to future outcomes, prediction market platforms convert real-world contingencies into tradable financial products. In the last year, users have traded on uncertainties like elections, corporate events, sports outcomes, weather, public health developments, geopolitical crises, and even war or death. Prediction markets are defended on the basis of providing benefits like information aggregation or better informed risk allocation. In addition to the users attempting to profit from event contracts, prediction market platforms generate revenue by collecting a fee on each transaction. But prediction markets also have potential downsides, including the commodification of events that may involve harm to traders, third parties, and society more broadly. This Article asks when prediction market platforms and their users should be permitted to commodify uncertain, future events and gain financially from users’ predictions. Much of the current debate centers on how to classify prediction markets within existing legal regimes, such as gambling or derivatives law. This Article takes a purposefully broader perspective to develop a more fulsome understanding of the transactions occurring on prediction market platforms. It argues that prediction markets—like many areas of technological and financial innovation—require an assessment of their potential benefits and harms through a lens of bounded commodification. Bounded commodification stands for the principle that there are limits—legal, ethical, and societal—that do and should constrain the private transactions profit-seeking individuals and firms may pursue. Drawing on contract law doctrine and theory, this Article offers a foundational framework for assessing when event contracts should be prohibited, when they should be regulated by state and federal authorities, and when the platforms themselves should be required to adopt ex ante, firm-level internal controls and compliance systems. Prediction markets are here to stay, requiring a principled account of when law should permit or constrain users and platforms to profit from prediction.