Friends at sports bar cheering together by rawpixel.com via Adobe Stock.
Hersh Shefrin is a faculty scholar with the Markkula Center for Applied Ethics and he holds the Mario Belotti Chair in the Department of Finance at Santa Clara University's Leavey School of Business. Views are his own.
Prediction markets make it easy for people to bet on all kinds of events pertaining to finance, politics, pop culture, and sports. These markets are booming along with sports betting on apps. The Wall Street Journal reported that total trading volume on the two major prediction market platforms, Polymarket and Kalshi, has soared to $24.2 billion in April 2026, compared to $1.8 billion a year before.
In the U.S., most betting, be it on prediction markets or on sports apps, is on the outcomes of sporting events. Indeed, betting on sports accounts for between 85% and 90% of the total betting volume on U.S. prediction markets.
How is all of this affecting young people, especially young men, who are the most impacted by the surge in sports betting. Some have become addicted to the activity, and are being harmed by turning away from their studies, losing social connectedness, and losing money, in some cases a lot of money. Others participate occasionally, as entertainment or out of a need to feel part of social group. Still others do not know what to think, but do have questions.
What High School Students Want to Know About Prediction Markets
Earlier this year, male students from a San Jose high school reached out to me with a series of questions about prediction markets. Knowing what questions are on students’ minds is as important as the answers. Below are the questions they asked and my answers.
QUESTION: How do prediction market apps such as Kalshi and Polymarket work, and how is it different from traditional betting apps such as DraftKings?
ANSWER: Let's start with betting apps. Imagine that you buy a traditional lottery ticket. You win if the number drawn in the lottery matches the number on your ticket. Your ticket is a claim on a prize, IF there is a match between what's printed on your ticket and an event that happens in the real world. You buy these tickets at a price set by the issuer of the lottery ticket. Betting objects are like lottery ticket numbers. Instead of a number to be drawn at random, there is an outcome, say who wins a game and by how much. You place a bet by buying such a ticket at a set price. Prediction markets are a bit different. You buy a lottery ticket from someone else who owns it, and do so in a market where the price is set by the continuous interaction between demand and supply. The two markets are also regulated differently. State agencies regulate betting markets, while Federal agencies regulate prediction markets. Given the predominance of sports betting in prediction markets, states are working to bring prediction markets under their jurisdictions as well.
QUESTION: What are some positive/negative impacts of prediction markets?
ANSWER: On the positive side, these markets provide a mechanism for the wisdom of crowds to be expressed, by the aggregation of diverse information. On the negative side, these markets create incentives to cheat and engage in bribery, for example by bribing athletes to throw games.
QUESTION: What is the main reason for the exponential rise, in your view, of prediction markets?
ANSWER: I think the main answer is ease of use because of the existence of efficient apps. Ease of use greases the wheels for the explosive expression of dopamine-driven fads and fashions, where people fear missing out on a highly popular online activity. After all, who wants to miss out by not doing something that meets the human need for dopamine-related excitement that is produced through risk-seeking activities?
QUESTION: Does the rationality of these prediction markets play a big role in how they are viewed?
ANSWER: No. In a rational world, very few people would enter these markets, because most people are uninformed about the events on which they are putting down money. In a rational world, most people avoid the imprudent risk of betting against someone who knows more than them. But here it's the other way around. Some people took the other side of the bet by U.S. serviceman Sgt. Gannon Ken Van Dyke who bet on the basis of classified information about the timing and outcome of an attempt that the U.S. military to capture Venezuelan dictator Nicolás Maduro.
QUESTION: What are the risks behind the high-rise and promotion of the prediction sites?
ANSWER: For one thing, many people who win will overestimate their intelligence relative to being lucky. For another, some people are prone to becoming addicted and will waste money, and risk falling into the trap of anxiety and depression. Here are two things to keep in mind about Gen Z, your age group. First, the percentage of sports bettors who make any money at all after seriously betting for a year is 2%. The rest lose money and those with gambling problems due to addiction lose everything or almost everything. Second, the percentage of people who become gambling addicts is three times higher for Gen Z than for the rest of the population, the result of growing up with social media as the first generation to really do so: Scary.
QUESTION: Do prediction markets create a knowledge gap between insiders of whoever the bet is placed on (or insider traders, generally) and the general public?
ANSWER: The gap is already there. It might widen, as happens with meme stock investing. But overall, prediction markets will reduce the gap as uninformed participants learn the hard way about how little they know, by losing money.
QUESTION: Have prediction markets such as Kalshi and Polymarket replaced traditional polling methods?
ANSWER: No. There is an industry that does political polling, with vested interests. They will push polls, even as prediction markets do a better job of forecasting election outcomes. But over time, as the popularity of prediction markets grows, the influence of traditional polling methods will wane.
Ethical Issues and Analysis
Although the high school students did not ask about ethics per se, they might have, in which case I would have provided an answer based on my academic work with my Finance Department colleague, Meir Statman. In the 1990s, we developed an ethics-based framework to analyze the degree to which financial markets could be considered fair. Our framework is based on the concept of fairness as a claim to entitlements. These entitlements fall into seven classes, ordered from weak to strong, as follows.
The weakest form of fairness is freedom from coercion. According to this entitlement, prediction and betting markets are deemed fair if participation is completely voluntary, with all parties understanding that the operating principle is caveat emptor, buyer beware.
Next comes fairness as freedom from misrepresentation. According to this entitlement, prediction and betting markets are deemed fair if the information provided by these markets is completely truthful. Here buyers need not beware that the market is providing them with false information.
Next comes the entitlement to equal information. According to this entitlement, prediction and betting markets are deemed fair if no parties hold private, or insider information.
Next comes the entitlement to equal processing power. According to this entitlement, prediction and betting markets are deemed fair if no participant has an edge in being able to process information that is germane to the betting events. This has always been a strong requirement, which has only become stronger with the progress being made in AI technology. The Wall Street Journal reports that professional traders have been purchasing access to big-data streams from third-party providers in order to have a leg up. In this environment, casual traders have almost no chance to succeed for extended periods of time.
Next comes the entitlement to freedom from impulse. According to this entitlement, prediction and betting markets are deemed fair if there are paternalistic guardrails to prevent parties who suffer from gambling addiction from harming themselves. This entitlement also includes the right to be protected from predator advertising campaigns. These campaigns lure gambling addicts with messages about the ease of making winning bets and using winnings to pay rent and other necessities.
Next comes the entitlement to transact at fair prices. According to this entitlement, prediction and betting markets are deemed fair if the prices for the various bets are not rigged or manipulated.
The last entitlement features equal bargaining power. According to this entitlement, prediction and betting markets are deemed fair if all parties have similar next best alternatives when it comes to participating in these markets.
So how fair are prediction markets in practice? The Wall Street Journal reports that on Polymarket, 0.1% of accounts make 67% of the profits. On Kalshi, losers vastly outnumber winners, with there being 2.9 unprofitable users for each profitable one. At best, the market is fair in the sense of parties being entitled to receive truthful information.
Dopamine production associated with risk-taking is big business, and not just on prediction markets. There is currently a surge of risk-taking underway in the stock market. In addition, government-run lotteries consistently draw lots of interest. The state of Massachusetts consistently rates at the top of the list for state lottery purchases. Averaging total annual expenditures on lotter tickets in the state, and dividing by the number of Massachusetts households yields a number of about $2,300 per household per year. That amount is not small potatoes, especially for low-income households who are the major lottery ticket purchasers. The state of Massachusetts makes about $1 billion per year, net of prize money, from lottery ticket sales.
State lotteries are typically fair in the sense of equal information, and so are fairer than prediction and betting markets. That said, it is a good bet that state lotteries are not as effective at generating dopamine flows, especially for young men. Perhaps the most important ethical issue for prediction markets is regulating them to make them fairer in the sense of freedom from impulse.