KALSHI BRINGS THE REAL-WORLD HEDGE SCOOP!

"“Prediction markets” is, mostly, a fancy way to say “sports gambling"," wrote Matt Levine yesterday #1501158"“Prediction markets” is, mostly, a fancy way to say “sports gambling"," wrote Matt Levine yesterday #1501158

...and we've talked about this a tad around here... is there a real use case for non-institutionalized gambling sorry, prediction of real-world events?

PRO CASE: Yes, we need a fuller trading market universe, and that allows people to express opinions and incentivize information to come out. Complete markets and efficient, arbitrage information, yada-yada.

CON CASE: No, this is all just unproductive, degenerate, negative-sum behavior. Undisc is wrong to say that looking at colors on a screen is equivalent to checking the price on [whatever] on Kalshi.
Holders of losing contracts aren't morally and economically equivalent to consumers. The welfare economics and spillover effects are completely different.

Look, Look, a real-world hedge use case on Kalshi! Oh... oopsLook, Look, a real-world hedge use case on Kalshi! Oh... oops

So here's a NYC bar offering free drinks if the Knicks win the first game

Now, an Upper East Side beer garden is joining in on the Knicks mania. The Jeffrey, a neighborhood bar on the Upper East Side, is taking the basketball fever dream to its logical conclusion: free drinks if the Knicks win Game One of the series — and a $5,000 Kalshi trade to soften the blow if they do.

Andy Freedman, The Jeffrey's owner and a co-managing partner at Olshan Frome Wolosky, told Business Insider he placed a $5,000 "YES" trade on Kalshi, the prediction-market platform, backing the Knicks to win. If they do win, he said, the trade would pay out around $13,500. The payout money would help offset the cost of comping a room full of euphoric Knicks fans, he said.

If he loses, he's betting enough people had shown up to his bar and spent dough to recoup his 5k gambling investment. FUNKY!

Here's Levine explaining the century-long economic and jurisprudential conversation about speculation/gambling/financial derivatives connected to some asset price:

Wheat futures are for hedging. Farmers can sell futures to lock in the price of wheat before they plant, so they can have predictable income. Bakers can buy futures to lock in the price of wheat next year, so they can have predictable costs. Oh of course in modern markets hedge funds and retail investors can buy and sell wheat futures without having any preexisting economic exposure to wheat prices, as pure speculative bets. But those speculative bets — even if they make up most of the volume — are epiphenomena on the real economic purpose of futures markets, which are to allow real industrial producers and consumers to hedge their risks. The speculators provide liquidity and price discovery and efficiency to a market with a real economic purpose.

Turns out, sports gambling isn't hedging! It's, uh, gambling:

But prediction markets are different, in that they are sports gambling. Is the purpose of sports gambling to hedge real economic risk? Noooooooooooo. Noooooooooooo. No it is not. You can tell this from a second’s introspection: You have never bet on a sports game, or met anyone who has bet on a sports game, to hedge some existing economic risk. People do not bet on sports to make their cash flows steadier. People bet on sports to make their cash flows more variable. [5] Sports gambling is the opposite of a hedge. It is gambling. You can tell from the name. There is nothing confusing or mysterious or controversial or difficult about this.

As for Freedman's Kalshi bet, he says:

Because I am a grump, though, I have to point out that the guy is not going on Kalshi to hedge a preexisting economic risk. He’s going on Kalshi to hedge a sports bet! He bet everyone at his bar free food and beer if the Knicks win, and he’s hedging that bet on Kalshi.

It's a derivative bet off a sports bet, CDO-squared!!

...and it's not even using prediction markets to hedge real-world risk. Causality runs the other way: he found a way to structure his business/offer marketing for said business in opposition to a bet, and then make that trade.

Fucking amazing and clever, but still gambling; still silly.