I always assumed prediction markets weren't popular because they are frequently shutdown by governments. The authors disagree explicitly:
The explanation usually put forward by proponents is simply that these omniscient markets are unfortunate victims of broader prohibitions on gambling. If we could change these rules, we might know accurate probabilities of many more future events.We disagree. Instead, our view is that prediction markets on everything – liquid markets over a wide range of important topics – will not work without subsidies. These subsidies would be expensive, so other forms of information aggregation are usually more attractive. The scarcity of prediction markets in the world today is not a failure of regulation, but a sign that they are much less promising than many advocates, including the authors of this piece, once hoped.
Their theory is that they don't have market-fit:
Rather than regulation, our explanation for the absence of widespread prediction markets is a straightforward demand-side story: there is little natural demand for prediction market contracts, as we observe in practice.
In their view, PMs mostly attract gamblers because other market participants, savers (wealth builders), aren't attracted to zero-sum games:
Prediction markets, unlike most asset markets, are zero-sum – in fact they are negative-sum, once you factor in platform fees. And if your money is in a prediction market, it can’t be invested in equities, or be earning interest in the bank, either.
And sharps, career market optimizers like hedge fundy people, won't be attracted to a market without the liquidity provided by savers:
But since prediction markets lack savers – who flood security markets with capital and create profit opportunities – this never happens. Prediction markets are orders of magnitude smaller than other financial markets.
They also conclude that even gamblers are weakly attracted to PMs because quick resolution is a key requirement for most gamblers and most PMs outside of sports have long resolutions:
Our view is that, for gamblers, quick resolutions are one of the key things that make a bet attractive and exciting. Sports betting sites’ futures bets on longer-term outcomes are far less traded than bets on single games about to happen, even when the future event (like the winner of the Super Bowl) is far higher-profile than tonight’s game.
In their own words:
Given these conditions, it is not a mystery why there aren’t more and larger prediction markets. Savers don’t want to go anywhere near them. Gamblers have more fun ways to chase their thrills. Sharps have no reason to enter the markets. We’re left with the small markets and wide spreads we find on Kalshi, PredictIt, and other prediction markets.
I have to code but they market-fit can be solved with some kind of subsidy. They even imply that without a subsidy, PMs are pricing information at $0:
Instead, we must recognize that good information about the future is costly to come by, and we must be willing to purchase or create incentives to elicit that information. There is no epistemic free lunch.