This is the Reason Interview with Nick Gillespie. I'm talking today with Tarek Mansour. He's the co-founder of Kalshi, the prediction markets platform that allows people to win or lose money, or invest or not money, on everything from election results to weather outcomes, to who will win Dancing with the Stars, and of course all sorts of sports. Thank you so much, Tarek. You're 30 years old. You're a billionaire. You're a big believer in prediction markets as truth machines. I want to talk about that in a minute, but first, Kalshi gives money to a lot of nonprofits, including Reason Foundation, the nonprofit that publishes this podcast. There are no conditions on this interview. Tell me first: what is a prediction market in the simplest terms possible, and why is it different than a sports book?
I think a prediction market, in the simplest terms possible — it really is like the stock market, but the thing that you're trading. So we're matching buyers and sellers in an open marketplace that is competitive, and the thing that they're trading is not a small specific subset that generally Wall Street cares about, whether it's a stock or a bond or a credit default swap or all these kind of sophisticated things. It's simple questions about the future, right? Everything is yes or no. Some things are actually more like, is it going to go up or down? And there's more structures now, but I think of prediction markets as just a generalization of the stock market. One way to think about the stock market is actually a prediction market on the prices of stocks, on companies.
And you make money not on whether or not you bet right or wrong — you're not the house, you run the platform. So it's like you own the casino, but you're not staking anybody's transaction.
So we're exactly like owning the stock market. We're like the New York Stock Exchange. The New York Stock Exchange is not in the business of pricing a stock or setting the prices. They're in the business of matching buyers and sellers. And so you may have an opinion that something is going to happen, and somebody else may have an opinion that something is not going to happen, and we match those two to settle that disagreement of opinion via trade. Historically, that's about stocks. Someone thinks Apple stock is going to be worth more than the current price, more than $100 per share, and someone thinks it's actually overpriced. They make a trade as a way to settle that difference of opinion. The difference in a prediction market is you're doing whether Brexit is going to happen or not. And you may think it's very likely that Brexit happens, and your counterparty may think that it's not very likely that's going to happen. And let's say the market right now is trading at a 40% chance, 40 cents on the dollar. You may want to buy, and the other person wants to sell, and we match the two of you, and I take 0.7%. So if you put 100, the other person puts 100, I take 70 cents.
And now, very quickly, explain why that's different than a sports book — like why you're not fan—
Here's how I'll explain it, and I'll get back to the exact sports book analogy. When the first version of financial markets came around — very few people know this. People think the first financial market was the stock market, but actually it wasn't. It was the commodities markets. The first real example of a financial market was the rice futures exchange in Japan. And then in the US it became very popular at the end of the 1900s, at the end of the 19th century. It was farmers trading on the price of grain, using grain futures, and then over time it evolved to oil futures etc. And at the time it was really interesting because when I tell you about grain futures right now, you don't think gambling, you think boring mainstream financial markets. But at the time the states were suing the Chicago Board of Trade, saying this is gambling. And what was the claim? Saying, well, farmers are betting on the price of grain, they're speculating, you know, and so it looks and feels like gambling. Like what's the difference? And at the time they didn't have sports books or casinos. They had the bucket shops, which were different from the Chicago Board of Trade. So what were the bucket shops? The bucket shops was a place where the shop, which functioned like a casino, sets the prices. They would say, 'Here's the price of grain. Here's what I'll let you buy and here's what I'll let you sell.' And the purpose was basically it was a casino. Farmers would come and bet against the bucket shop and then they would lose money. And if you were a smart sophisticated trader, they would ban you. You know, the card counters get banned from the casino.
It continues to happen on sports betting and in casinos, right? Like if you're a smart sharp trader, you get limited. And if you maybe have some addiction issues or you lose consistently, you get promos and you keep going back. That is the gambling business model.
That is the gambling business model. And when people were claiming that the exchange was gambling at the time, the Supreme Court ruled in favor of the Chicago Board of Trade, and the basis was very simple. It's like, yes, some people are speculating, which looks and feels like betting — sure. But the mechanism is different, and there's a public good that comes out of it. The mechanism is a free, neutral platform that lets people trade against each other, and what it does is it incentivizes the card counters, the smart traders, because the public good that it brings is the informational knowledge that it gives to people.
Talk a bit about this, because this is key to your argument, and we'll get into the regulatory structures and the cases against you. Prediction markets serve a public good because they create — they give more information about what is likely to happen, or how actors are going about their business. How does that happen? In particular at a place like Kalshi — you can bet on whether it's going to rain tomorrow, or how much — like, how does that in any way create information that is useful?
So a weather forecast — when people are trading on whether it's going to rain tomorrow or not, what happens is you get price discovery. Some people think the odds of rain are a little bit higher than the market, so they buy it, which moves it a little bit up. And then some people think it's lower, and it moves it a little down. And that continuous thing is how a stock moves. That's what we call price discovery. Price discovery is essentially — there's a quote from a Supreme Court decision in 1905 that is really neat: this idea that speculation is the self-adjustment of society to the probable. Which is like — it's the self-adjustment of the market, the wisdom of the crowds, to what we think is going to happen. And there were papers actually, like a week or two ago, that compared our weather forecast — the forecast from the prediction markets and the weather — to the most accurate national blended average of weather station forecasts, and we were 10% more accurate.
How — I mean, just very — how does that happen? Because like Joe Schmo betting on the weather, he doesn't have—
I'll give you a little bit of history because it's so— Prediction markets — I think the founder of prediction markets is Friedrich Hayek, the economist. He used to call them information markets. And what was the sort of central thesis? At the time he's saying we have a knowledge problem. The knowledge problem is that our decisions in society — whether it's DC, whether it's executives — are centralized. It's you and I sit in a room and make a very critical decision about the future of the country, but the information that's relevant to that decision is actually very decentralized. It's sitting with a bunch of different people — hundreds of thousands, millions of people distributed across the board. So we need a magnet, we need a mechanism to bring that information from everyone so we can make better decisions over time. That's what markets do. That's exactly what markets — market prices are a very good aggregator of information.
Okay. So then the idea is that somehow the people who are betting on the weather have some kind of meaningful knowledge that otherwise would not be captured.
And by the way, the people are not even usually like — for example, for the Senate race right now, they don't buy Democrat or Republican and then hold it till maturity. They buy if they think the price is underpriced, and they sell it if it's overpriced. They're constantly trading these things. But the key thing here — when I started the company in 2018, a few years before that, Philip Tetlock did—
Right, at the University of Pennsylvania. And about superforecasters, right?
Oh, I'm sorry. Okay. And the whole thing — he was trying to figure out the science of forecasting: who are these people that are good at forecasting? And he pitted a bunch of elites on geopolitics — you know, the big pundits — against a bunch of random dudes, basically, and had them predict geopolitical events. And guess which group did better?
Right. And it was amazing because it tells you — actually there is a lot of wisdom in this idea of wisdom of the crowds. If you add the average people all up and all their bits and pieces of information, you end up getting way better solutions and results than the small group of elites. And this gets reflected — the way Hayek talks about it in 'The Use of Knowledge in Society' and throughout the Austrian school of economics — markets and prices are discovery systems that transmit information. That's exactly — and prediction markets are like transmitting information about a much broader— we used to care about— farmers used to care about what the price of grain is going to be. Why? And I go back to the farmer: imagine we had banned grain futures as gambling at the time.
There's a very clear net impact in society today, which would be what?
Well, the important thing is that the price discovery that was happening was giving the farmer predictability on what the price of grain is going to be in September. So now, in March, I know how much I can invest and how much I can plant. If you take that away from them, what would they do? They would plant less. Because with less predictability you can invest less, and so actually our food supply would go down. That's how critical grain futures are.
You know, that makes total sense. And then just to press on this a little bit — and as a libertarian, I like markets and everything, I like prediction markets etc. — but what is the positive social externality other than people being able to express themselves or entertain themselves with like betting on Dancing with the Stars?
Well, I think to me it's like — sure, some people may disagree on the lines of— but a lot of people care about that, and I'll give you a lot of examples. At a high level, it seems like we agree with the premise that getting smarter, even if it's a little smarter, about what's going to happen will enable us to make better decisions and allocate resources more effectively and manage risk more effectively. Right? Now, what's interesting is — I always think of this as: you want more markets on more things because that's more information. It's more information. It's just that simple. And I'll give you an example. This was the same argument that was made. There are two types of commodity futures that are banned: onion futures, which I can tell you the story separately — there was a wild story. The second one is box office futures. In 2010 there was an exchange that was trying to bring them to light, which is an idea to do price discovery on how successful a movie is going to be beforehand. Guess who killed it?
I'm assuming the movie companies.
The big ones. Why? Because they wanted less information. And the argument at the time was, well, it's frivolous — what is the purpose of knowing if a movie is going to be successful? It's frivolous.
And this is called like a Keynesian beauty contest or something, where you're betting on what you think other people will say is going to happen or something.
Yeah. I mean, but in this specific one it's more like they were saying, look, knowing if a movie is going to be successful or not, that seems frivolous. It's not like grain futures. We should ban it. But they actually had an ulterior motive, and there's a reason. They did not want price discovery, for two reasons. One, if the market can predict ahead of time how successful a movie is going to be, it'll be harder for them to juice the three, four weeks of box office they get on a bad movie, right before the word gets out. And there's a second reason. If you have a market that will tell you upfront, actually this team is doing a good job even though it's a small team with a smaller brand, you may attract more investment to the smaller studios, which is going to bring more competition to the space. So there's no democrat— I mean, markets are democratizing ultimately, or they push against centralization. More information is always better, and oftentimes monopoly and incumbents want less information because, you know, markets usually reduce—
So, well now let me — and I want to get to the regulatory structure you're currently under, plus what various states are trying to fit you into a different kind of regulatory structure. But just on this moment, let's stop for a second. 'More information is always better.' Why do you ban insider trading? Because there is an argument that insider trading is absolutely the best information, and it reflects prices very quickly and makes markets more efficient. And libertarians like that's the argument — the free markets side of me always tells you, like, you want more, you want as much as possible, and when Practical Magic 2 is coming out, you want the people in the studio who have seen it, who know it sucks, to change — you know, to affect the prediction, right?
I'll say in practice, but maybe right before — I want to just make, because you asked me about the gambling distinction, which we'll get to — gambling is a model where the thing they incentivize for their customers is fun and entertainment and to keep losing, right? That's why they give you the suite and the drinks and they keep losing. Prediction markets — what they incentivize is going out there, like markets: seek knowledge, seek truth, and then come get rewarded for it in the open market. That's why there's a fundamental difference, and it doesn't matter what the topic is. It could be grain futures, it could be weather, it could be economic, it could be sports — it doesn't really matter. The structure, the formal structure, is what really matters.
Now, on the insider argument, I agree with you. It's like, well, should the insider be allowed to trade? And the way I always answer the question is: why is insider trading banned in the stock market? Because in theory we would get more accurate prices in the stock market. And there's a very practical reason, and this is how it goes — how markets should be regulated, and I strongly believe that. That's why we took a pro-regulatory first approach to this, because markets can only exist if there's fair rules of the road and the competition is fair and equitable across all the participants. So I think, like, actually—
And people need to believe that the market is fair — otherwise people stop trading, right? Yeah.
Like free markets, in my view, are like — if you take the opposite of free markets, it's this idea there's a privileged closed circle that has access to specialized information, right? And the key thing in the line I draw is: if the information is something you can access by doing research and work and putting in the effort, no matter who you are, then it's fair game, right? But if it's information that you only have privileged access to because, I don't know, you work in government or you're an executive at a team, then it's unfair. It creates an unfair dynamic that over time dries up liquidity and makes the market less efficient over time because nobody will trade, right? People won't trade.
So this helps explain — you noted you co-founded Kalshi in 2018. You went to the Commodity Futures Trading Commission to get licensed and regulated at the federal level. So when people say, 'Oh, you guys are completely unregulated,' that isn't accurate. Completely inaccurate. How does the CFTC regulate what you do? And then we'll get into how and why states might be trying to change that.
I think they're two entirely different. There's a reason why the states are trying to change that, and we'll talk about that.
It's fundamentally protectionism. But the beauty of the Commodity Exchange Act — so why did it come? It actually got created after this whole fight that the Chicago Board of Trade was having with the states, and the Congress in '74 enacted the Commodity Exchange Act to actually preempt two types of laws: state insurance laws and state gaming laws. And there's a reason why: because on an open exchange in grain futures or on Kalshi there's two types of activity — speculation, which looks and feels like gambling, or hedging, which looks and feels like insurance. Right. The difference between those two is they're being done on an open market. And why do you need the federal statute? Why wasn't the Chicago Board of Trade done state by state? Because it didn't work. And here's the easiest way to explain it. Imagine we siloed the New York Stock Exchange state by state, where in New York you can only buy Apple stock from New Yorkers. Imagine we had 50 different New York Stock Exchanges — different prices, different rules, fragmented liquidity. What would happen? Worse prices, right? A bunch of dead weight loss, lower liquidity. If you're in Kansas, you won't be able to buy as much stock as you want. It is a completely anti-market kind of structure.
What you want is a federal uniform set of rules that apply across all 50 states that promote and foster this sort of multilateral, peer-to-peer idea — someone in California trading with someone in Texas — and you want as much information as possible. You don't want to silo information. That's the anti-market view. And what does regulation mean, and why is it important for us to first get regulated at the commodities level? Because the rules that apply to trading on oil futures or interest rate swaps or politics on Kalshi are largely the same. So what do you want to prevent against? You prevent against insider trading. You want to prevent against market manipulation — doing things that move the market price unnaturally for profit. You want to add sensible guardrails around knowing who your customers are, and money laundering, and that sort of thing. And I believe in this, and I think this is where the regulator is very important: most of these products — whether it's grain futures or sports betting or prediction markets or trading options on Robinhood — most of the use is fine, and it's not about people winning or losing. In competition some people are going to win, some people are going to lose, but there's some degree of irresponsible use. I do believe in that. And I believe in individual freedom — people should be able to choose — but I think there should be some regulations on irresponsible use so that companies are not targeting those types of behavior. You know, the sports books constantly attack those types of like—
Yeah. So let's just real quickly — how do you guard against insider trading? I mean, you ban it, but how do you know whether insider trading is happening? How do you know whether or not somebody who has a problem is continuing to use Kalshi? How do you find these?
Yeah. So insider trading is the evergreen question for a stock market. How do you—? And it's largely a very similar mechanism. So one, you have to verify all customers. It's like onboarding onto Schwab, opening a brokerage account.
Are you covered by know-your-customer rules? And that is distinct from something like Polymarket, which is based on— and they're struggling with the idea that there may have been a member of the US military who traded on Maduro being removed because he was part of the operation, which is kind of a classic case of insider trading. Like, that's insider trading, but okay.
Because insider trading — it's like, are you trading on material information? Do you have a piece of information that you're not supposed to disclose legally? Right. And trading is a form of disclosure. It's the same, you know, you can go—
So you follow KYC. And then how do you—
And you have the same systems as the New York Stock Exchange, which basically flags suspicious patterns — market regulation. The patterns are always weird. You always have an account that is trading hundreds of dollars, now they're trading thousands of dollars all of a sudden and on an asymmetric shot. What's happening? Right. And the last piece is you enforce. So when you find someone, we have, as a self-regulated organization, we can impose fines all the way to referrals for criminal prosecution. And the last piece that's so interesting about prediction markets — I think it's even unique compared to some of the financial markets — all of our trades are public, right? It's all fully transparent. Because why is insider trading bad? The person who gets harmed when someone commits insider trading is the person on the other side, right? That person is extremely incentivized to whistleblow usually. And so George Santos basically tried to commit insider trading on Kalshi a few months ago. We had 100 whistleblower complaints within a few minutes. Because traders immediately tell us, 'Oh, this is weird,' and they can all see it publicly. And that's actually kind of a curse because the press talks about insider trading cases on prediction markets all day because they're so easy to flag. But that's actually a blessing if you really think about it because it's so obvious, right? It's so clear. You're committing crime in broad daylight, right?
So let's talk about — the state of Arizona, I mean, there's about 20 jurisdictions, I guess states, also some Indian tribes and things like that, that are bringing suits against Kalshi. Arizona earlier this year launched a criminal indictment that you're running an illegal gambling operation. New York State — we're talking in New York, and you guys are headquartered in New York, right? — is saying that you're basically, I guess it's not a criminal indictment, but they think you owe them billions of dollars because you're essentially a gambling operation. What did they get wrong about your structure?
I mean, let me read you something that I've sort of been looking at recently that I've been really into. I'll read you one of the core opinions, and here's how it sort of goes: 'We are clearly of opinion that dealing in these markets is void by the common law for, among other reasons, it is contrary to public policy. It is not only contrary to public policy but is a crime: a crime against the state, a crime against the general welfare and happiness of the people, a crime against religion and morality, and a crime against all legitimate trade and business. This species of gambling has become emphatically and pre-eminently the national sin, and in proportionate extent it is immeasurable.' And they go on and on about how horrible the activity is. This is the Illinois Supreme Court, and it's from actually 1888, and it's about grain futures, not prediction markets.
And I think the same thing is — this really is as simple as that, because we have the same structure. And the topic never mattered under federal law, but states misunderstood it, and they just looked at grain futures at the time as like — because people don't understand markets. Markets have always been something that people find counterintuitive. And I always think: imagine we had banned grain futures back in the day. We would have ruinous consequences. It's today one of the bedrocks of the US economy. We would not be able to function without grain futures. And everybody benefits — I mean, there are individual winners and losers, but you get a more stable supply of food, better planting, better— I think 100 years from now, when there's going to be the next generation of entrepreneurs coming around and expanding the universe, they're going to be looking at this and thinking: imagine we didn't have a good gauge on where the election is going to land, or where geopolitics, the weather, the climate, the hurricanes. And you're starting to see today our fastest growing segment is actually businesses hedging on Kalshi.
So, you know, you can take a position because you want to make money, speculate, but a lot of people take positions because they want to reduce their risk towards an event. So the same way grain farmers would short the price of grain so that if the price of grain goes down in six months they would offset their revenue loss, we see a lot of businesses do the same. One example: we have now hundreds of businesses that do the same — sports bars hedge against their home team losing every game, right? Why? Because if the team wins tonight, I will make $2,000 of revenue. If it loses, I'll make $800 of sales, and my cost is the same because I have to stock up on inventory. So it's 1,200 no matter what. If they win tonight, I make $800; if they lose tonight, I lose $400. Unpredictability like that is very bad for small business. So they buy no on the Knicks — they short the Knicks winning in a way that essentially compensates their P&L, so they're up $300 no matter what. Right? And why is that important? Because predictability — it's a bit like how the airlines hedge their price. Predictability helps with investment, helps make their decisions.
Quick question before we get to why the states are bringing these suits the way they are. But does the financialization — or does the prediction-marketizing of everything — does that have a corrosive effect, say, on sports? I mean, you know, and leagues, and this goes back to the 1919 World Series in Chicago — the Chicago White Sox famously had some players who threw it. But when everything is being bet on, everything is being speculated, does that end up undermining something fundamental?
So one, everything— okay. Two, I just want to be clear: we are not adding anything to sports. Sports books have existed, right? DraftKings and FanDuel. If you see all the cases of players doing bad things, they're actually on the sports books.
Can I ask — what percentage of your revenue or trades—
70% now. So it's going down — it was 96% nine months ago, so it's going down very quickly, because sports is a great way to educate people about probability — they get it, it's Moneyball — and our customer is the Moneyball type. And then over time they do politics and economics, and everything else is growing.
But I want to make a key point about this which is very important. The notion that prediction markets all of a sudden now allow people to bet or trade on sports — it exists already. The question is: do you prefer it in an open and fair marketplace where everything is transparent, or do you prefer it in a closed marketplace where everything is opaque, right? That is a question. And I'm a pro-regulation guy, so I think war, terrorism, assassination, violence, wildfires — things that create moral hazard — should not be traded on. We should not have markets on those, because the incentive is it's too easy to go and create a fire. But we also, as a market, we have standards that are more strict than the state gambling rules around things not being very easily manipulated in the Commodity Exchange Act. So, like, we don't do markets on whether the next play is going to be a ball or a strike, right? The sports books do these, and that's actually the vast majority of cheating cases etc. And that's also why we believe regulation is very important, because when you set the right guardrails on what markets should be in, what markets should not be in, and how do you police those types of activities, and when you find someone that does it, how do you punish them very heavily. The last thing I'll say is we actually ban athletes from trading on anything that relates to their leagues.
Okay. That — I'm sorry, anything at all or just—
Anything in their leagues, yeah. The same way we ban politicians or members of Congress from trading on things that relate to Congress. Remember, you know, so all of that goes into our—
That's like the only place where congressman can't bet on what they're about to legislate, right?
They can do it on the stock market, but not on Kalshi. Kalshi was a sponsor of the US Open. Yes. Right. Which is kind of interesting. And there, you know, there's a growing acceptability of NHL and MLB and you're going to see a lot of other leagues.
But you've also recently, you said that you are going to limit people who are abusive towards sports figures.
Yeah. Explain that because is that now are you saying as a condition of betting on or entering contracts on Kalshi you're going to limit the speech of people or like how does that work without running into First Amendment issues?
That's a great question. I mean, look, I think there are certain bad cases where, and by the way, it's not just about sports, it exists in really anything. I mean, the the... But I think the idea that someone... we always want to be careful about regulating the bad behaviors out of the system. And I believe that, like, I'm a very free markets guy, but I do believe in sensible guardrails. And this we may disagree on that point. Like my view is like you the highway should be wide enough for people to compete and thrive and do all the great things that are going to do, but you have to have like a fence at the end of the highway to make sure people are not driving themselves off a cliff. And I think it needs to be very delicate and needs to be very careful. You don't want to make the highway like one car at a time because that's terrible. In this specific case, I mean, we have issues sometimes where people get over their skis and they go and harass. Yeah. I mean, if you lose $2,000 or $10,000 or $200 because somebody dumps the fifth set at the US Open, you're probably going to yell at that person who lost.
Yeah. I I I you know, yelling is one thing.
Harassing and, you know, following them online and do you know like the weird stuff that sometimes... and by the way, we haven't seen any evidence of that happening on Kalshi. That has historically happened on the online sports books and some of the other mechanisms. I just want to be ahead of it. I don't like that idea.
Okay. So then here is there any... you know, when the state of Arizona says okay you're like a gambling operation you're like the mafia coming in and you're running this billion dollar, billions of dollars... New York is doing something similar. They make in New York state I think like on a typical sports book they make something like they take 51% of gross revenue like they make a lot of money by taxing and regulating this. And that obviously they want money from you. Is there any other reason that they're doing this?
The casino lobby? I mean the casino lobby is like the foundational thing is a few things. So when an incumbent gets threatened competitively from a challenger, what does the incumbent usually do? They go to the government and say... litigate then legislate and then finally when you realize that this is here to stay you innovate. Right? Like that's the basic 101. It's always been the part for the course. And well because you know incumbents inevitably when you get big enough you want less competition. That's what you really want. And that's the dynamic that's playing out here. And by the way, it's not just about sports. We launched perpetual futures recently and CME the Chicago Mercantile Exchange the Board of Trade sued us over it. And you know and usually the policy argument is never 'I'm losing some revenue due to competition.' It's like you come up with a bunch of reasons like 'oh you know it's too risky it's too whatever' so they can get policy makers riled up and they usually have very orchestrated lobbies and you know comms functions that do these sort of things. But if we look at it foundationally first, it's interesting we have not... there's zero evidence of cannibalization between what we are doing and the gaming companies but also the sports books. Why? Because my core customer is a trader, is the guy that has 17 monitors and likes doing math and stats and that's 70-80% of my volume. That person is banned in the sports books.
Okay. Yeah. Right. Because if they're making, you know, I mean, so are do you think people are using Kalshi to make money or is it a form of entertainment? Because casinos and sports betting is really entertainment. I mean, do you think some people use options in the stock market as a form of entertainment like on Robinhood?
