Prediction Markets and Presidential Elections

Election Betting History: 1868-1936

While modern debates often treat election betting as a novel internet creation, wagering on American presidential elections is older than the modern financial system. In the nineteenth and early twentieth centuries, Wall Street in New York City was the epicentre of a massive, open market in presidential betting.

Between the election of Ulysses S. Grant in 1868 and Franklin D. Roosevelt in 1936, the curb exchange on Broad Street and specialized wagering brokers handled millions of dollars in election wagers during every presidential cycle. Major newspapers, including The New York Times, The Washington Post, and The Wall Street Journal, published daily betting odds on presidential candidates on their financial pages alongside railroad stock tickers and grain futures.

Economic historians, most prominently in studies by Rhode and Strumpf, have documented that historical Wall Street betting markets exhibited extraordinary forecasting accuracy. The betting markets correctly predicted the winner in eleven of twelve presidential elections between 1884 and 1928, failing only in the historically close election of 1916 between Woodrow Wilson and Charles Evans Hughes. The market disappeared only in the late 1930s due to the rise of scientific public opinion polling by George Gallup and the enactment of strict state penal code bans on election gambling.

Iowa Electronic Markets and CFTC Letters

The intellectual revival of election prediction markets began in 1988 at the University of Iowa's Tippie College of Business. Economists and political scientists created the Iowa Electronic Markets (IEM) as a controlled experimental research tool to test the Efficient Market Hypothesis in political forecasting.

Under specialized no-action relief granted by the Commodity Futures Trading Commission (CFTC) in 1992 and 1993, the IEM was permitted to accept real-money investments from students and academic participants, subject to strict regulatory caps limiting individual accounts to five hundred dollars.

Over three decades of academic operation, research published in peer-reviewed economic journals confirmed that the IEM consistently outperformed major media opinion polls in forecasting presidential popular vote margins, because market participants were financially incentivized to predict what would actually happen rather than express personal ideological preferences.

The Rise of PredictIt and Kalshi

The modern commercial revolution in political prediction markets unfolded across two distinct regulatory platforms:

1. PredictIt: Launched in 2014 by Victoria University of Wellington in New Zealand under an educational CFTC no-action letter, PredictIt allowed American citizens to trade binary contracts (priced from 1 cent to 99 cents) on hundreds of political outcomes, subject to an 850-dollar individual investment cap. When the CFTC attempted to revoke PredictIt's no-action letter in August 2022, PredictIt sued the commission in the Fifth Circuit, securing a preliminary injunction protecting its market.

2. Kalshi: Founded by MIT graduates Tarek Mansour and Luana Lopes Lara, Kalshi took an entirely different, institutional path. In November 2020, Kalshi secured formal registration from the CFTC as a Designated Contract Market (DCM)-the exact same federal regulatory status held by the Chicago Mercantile Exchange (CME). Kalshi sought to bring event contracts into the mainstream financial regulatory framework, offering fully regulated binary derivatives on inflation metrics, GDP figures, weather events, and political milestones.

Legal Breakthroughs: 2024 to 2026

The pivotal legal collision between prediction markets and the federal government occurred in 2023, when Kalshi submitted certified event contracts tied to which political party would control the U.S. House of Representatives and Senate. The CFTC under Chairman Rostin Behnam issued an administrative order prohibiting the contracts, asserting they involved gaming under Section 5c of the Commodity Exchange Act.

Kalshi promptly challenged the CFTC in the U.S. District Court for the District of Columbia. In September 2024, U.S. District Judge Jia Cobb issued a monumental ruling in KalshiEX LLC v. CFTC, holding that election contracts do not constitute unlawful gaming or illicit activity under federal commodities law.

When the D.C. Circuit denied the CFTC's emergency stay motion, Kalshi launched nationwide political trading during the final months of the 2024 presidential election, alongside offshore decentralized platforms like Polymarket, handling billions of dollars in volume. By 2026, certified political contracts are officially listed on federal exchanges under CFTC oversight, establishing prediction markets as an accepted pillar of American financial and electoral infrastructure.

Prediction Markets vs. Polls: Information Aggregation

The economic foundation of political prediction markets is rooted in Friedrich Hayek's seminal thesis on the use of knowledge in society. In electoral forecasting, traditional public opinion polling suffers from inherent methodological vulnerabilities, including non-response bias, demographic weighting errors, social desirability bias, and temporal lag. A poll captures a backward-looking snapshot of voter sentiment at a specific moment in time, often published days after field interviews are completed.

In contrast, regulated binary prediction markets function as continuous, real-time information aggregators. Traders on Designated Contract Markets (DCMs) are financially incentivized to seek out non-public, high-value information-such as ground-level voter registration shifts, absentee ballot return rates, grassroots canvassing metrics, and adverse campaign news-and immediately incorporate that knowledge into market prices through capital allocation. If an individual believes a candidate is undervalued, they risk their own capital to buy contracts, driving the market price toward the true probability distribution.

Empirical research conducted by economists at the University of Iowa and Stanford University confirms that liquid prediction markets consistently outperform traditional polling aggregators and expert pundit forecasts. By penalizing ideological bias and rewarding objective accuracy with financial profit, prediction markets eliminate noise, providing policymakers, corporate risk managers, and national security analysts with the most reliable price discovery metrics available in modern political affairs.

The efficiency of prediction markets during presidential elections is further enhanced by their ability to dynamically price political volatility and breaking developments. During live presidential debates, unexpected economic data releases, or Supreme Court decisions, prediction market contract prices adjust within seconds, reflecting the instantaneous reassessment of outcome probabilities by thousands of independent traders. This continuous price discovery provides academic researchers and financial institutions with unparalleled real-time probabilistic data that traditional polling cannot replicate.

CFTC Contract Markets vs. State Gaming Boards

A critical legal feature governing election prediction markets is the jurisdictional boundary dividing federal financial regulation from state gambling enforcement. Under Section 2(a)(1)(A) of the Commodity Exchange Act (7 U.S.C. § 2(a)(1)(A)), Congress granted the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over all transactions involving contracts of sale of a commodity for future delivery traded on a DCM.

This exclusive jurisdiction clause establishes an impenetrable federal regulatory moat. When an exchange is licensed by the CFTC as a Designated Contract Market-as Kalshi is under Section 5 of the CEA-it operates under federal statutory supremacy. Federal courts have consistently held that state gaming control boards and state attorneys general possess zero legal authority to apply state gambling penal codes or state licensing mandates to federally regulated financial derivatives traded on DCMs.

Consequently, DCM exchanges are subject to twenty-three statutory Core Principles established by Congress, requiring real-time market surveillance, automated clearinghouse custody, strict capital reserves, and algorithmic detection of wash trading or insider manipulation. This institutional framework ensures that election event contracts operate as legitimate financial instruments rather than retail gambling schemes, creating an entirely separate regulatory domain under federal law.