The increasing integration of prediction markets into mainstream society presents a challenge for regulators and a potential decline in political motivation to enforce regulations.
This viewpoint is shared by the Roosevelt Institute, a progressive think tank critical of all-or-nothing exchanges. In a series examining the expansion of prediction markets and potential negative consequences, the institute explores the market’s influence on three crucial aspects of American life: financial institutions, media, and professional sports leagues, emphasizing the concept of “path dependence theory.”
According to the path dependence theory, the decisions made by companies and leagues in the yes/no exchanges sector today, even if seemingly benign, can have lasting implications that are difficult to reverse as time progresses.
“The costs of switching to a different path—some alternative way of doing things—become greater the further down the path you go, as the increasing returns of that path begin to self-reinforce,” notes the Institute. “A positive feedback loop emerges, gradually entrenching decisions that were made early on in the history of an institution or development. Large-scale changes, in turn, become harder to implement.”
In simpler terms, the more prediction markets become integrated into everyday life, the more challenging it becomes for institutions, policymakers, and regulators to introduce changes.
Prediction Market ‘Gold Rush’ in Financial Services, Media
With their rapid growth, prediction market operators are increasingly visible in mainstream media through partnerships and are making significant advancements in the traditional financial services sector.
Examining the top companies in the S&P 500 communication services and financial services industries, the Roosevelt Institute highlights that five communication services giants already have partnerships with prediction markets. Among them is Meta Platforms, the parent company of Facebook, rumored to be developing its own prediction market.
Although only Morgan Stanley from the top 20 financial services firms is currently involved in prediction markets through an investment in an operator, other institutions are considering entry, and many smaller financial firms are actively participating in the market as well.
The Roosevelt Institute states that the normalization of prediction markets in media, coupled with the potential interest of financial services firms in event contracts if left unregulated, will likely lead to further expansion of the sector, making it easier for large companies to enter and solidifying the industry’s presence as inevitable.
“In the absence of policy action, this trend is likely to continue, and as more and more firms expand into the prediction markets space, it makes the largest companies’ entrance easier, lending the whole enterprise an air of unearned inevitability,” adds the Institute.
Sports, of Course
The intersection of prediction markets and sports has been well-documented. Estimates suggest that sports derivatives, including parlays, contribute to 80% of the total volume on the largest U.S. prediction market. Major League Baseball (MLB), Major League Soccer (MLS), and the NHL have partnerships with at least one prediction market operator, while the NBA and NFL have maintained a cautious approach. Despite this, leagues and teams are increasingly accepting sponsorships from prediction market operators, potentially legitimizing the industry in the sports industry.
“Because these are ongoing arrangements that include features like regular meetings and continuous information-sharing, rather than one-off deals, they establish durable relationships that will only become harder to unwind as more leagues follow,” adds the Roosevelt Institute.
With the convergence of prediction markets with finance, media, and sports, the concept of path dependence may already be established, making any future changes in direction challenging.
“Once path dependence meaningfully takes hold, course correction will hinge on the rare moments when circumstances and political will converge,” concludes the Institute. “By then, how many more millions of dollars will retail traders have lost to sophisticated market makers? How many more insiders will benefit from trading on apparent insider information?”