Prediction market platforms like Kalshi are gaming and gambling rolled into one, psychiatrist says

Arizona Attorney General Kris Mayes has sued the prediction market platform Kalshi, accusing it of operating illegal gambling operations in the state, and for allowing gambling on elections, which violates state law.

Politics

Mayes files charges against online company Kalshi, says it broke Arizona gambling laws

Greg Hahne

Attorney General Kris Mayes alleges that Kalshi's prediction markets break the state's gambling laws.

This makes Arizona the first state to file suit against Kalshi; it comes several months after the state Gaming Department issued the company a cease-and-desist order.

The suit also comes shortly after Kalshi had sued Arizona, arguing it’s subject to federal laws, not state ones.

The website offers users a chance to put money on any number of things — from sports to tariff rates to oil prices to politics and elections.

To get more of a sense of what Kalshi, and platforms like it are about, The Show spoke with Timothy Fong, a professor of psychiatry at the UCLA School of Medicine and co-director of the UCLA Gambling Studies Program. Fong talked about how he classifies platforms like Kalshi.

UCLA Health

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Full conversation

TIMOTHY FONG: You know, it's very clear to me that these are risky financial activities. They're also forms of entertainment. They're also potentially investment tools. They're also kind of the new trend or fad in gaming and gambling all combined in one. So they're really this kind of like sausage of financial risk. And that's why it's kind of like almost like chameleon where it's like it is whatever it is people want it to be disguised as.

For me as a psychiatrist, when I look at it, the experience, the actual human experience of logging on and putting money on and risking money and winning money and earning money and losing money feels a lot like gambling.

And really, if I had to pinpoint it much more so, it's gambling when it's related to sports. That's what it is. I think there's questions about the other parts of investment and things like that are beyond the scope of just simply, are you going to win or lose? But to me, that's for the vast majority of these prediction markets, it's gambling.

MARK BRODIE: Well, so let's talk about some of the non-sports components. And one of the arguments that some of the platforms have made is that it's no different than like buying soybean futures or pork futures, or things like that, in terms of who's going to win an election or will a particular country get into an armed conflict with another country? I'm curious if you see it that way.

FONG: Well, I think this is why we're having these discussions and these debates, because for years we've separated out investing versus gambling. And we said the two things are not the same, and they shouldn't be in the same room, and they were never regulated by the same operators. Well, now the room are merging, right? And there's questions, right, about what's the difference between investment versus gambling?

And for years I would see patients who lost a lot of money on the stock markets. And I put on their charts gambling disorder. And they would argue with me and say, "I'm not a gambler. I'm a day trader. I'm an investor who just had a system that went wrong. I'm depressed. I don't have an addiction."

So for me, I define very clearly gambling is something where I put something of value at risk on an event of uncertain outcome in the hopes of winning a larger reward while potentially losing my initial wager.

So, when you think of it that way, all forms of investing are actually kind of versions of gambling. And I think, and vice versa, there are certain forms of gambling that are really forms of investing. So, it's not a crystal clear answer, because none of this is clear at all.

BRODIE: Yeah. Well, that kind of raises the question of some of these predictive markets or, you know, platforms like Kalshi where, you know, we don't really know who's impacting the outcomes. For example, like if you were to place money on whether Elon Musk shows up to a particular event, like there's really one person who can affect the outcome of that. If you're putting money on or buying a future on whether the U.S. is going to bomb Iran, like there are people who could see that and maybe invest themselves who then have the ability to change the outcome on that.

FONG: So, there's a blurring of lines. You know, I remember years ago when Pokémon Go first came out and it was like this blurring of line between the video game and the real world, right? And it was really innovative at the time. This is kind of what we're talking about, this idea that you now can have everything commoditized.

And that there's a difference between some of these "contract events" are things you cannot control, like the weather, like you know, what someone says on a speech, right? You have no control over that, but you can certainly influence it or, you know, have spheres around it that could actually change it.

Vice versa, there are now contract events where you yourself can actually influence the outcome. And that really does change all sorts of things in terms of, No. 1, it raises more questions. It just makes people question everything, right? Is this rigged? Is this set? Is this predetermined? It then makes people trust things, I think, even less. And I think that I have great concerns about that.

I think the third implication is really kind of concerning where by doing all these various contracts on real-world things, you do potentially have the risk for inciting violence or altering just the natural course of human events. But then people have argued on the flip side, oh, you know, all these political violence folks, they're not really interested in money, they're running it by a different political agenda. We just don't know that.

I think about this when you normalize betting, you normalize making money quickly. We've normalized risk taking and wagering on events. What does that do? It just desensitizes us to risk.

BRODIE: Do you see a difference sort of from a psychological — and maybe even a moral perspective — in terms of putting a contract or making a bet on, for example, the weather or, you know, the outcome of an election versus if a war is going to start or if there's going to be political violence or something that, you know, could lead to somebody getting injured or killed?

FONG: Yeah, I've been talking about this with a lot of my patients. And No. 1, the vast majority of, "contracts" on these prediction markets are essentially still mainly sports. You know, the actual revenue of these other ones is relatively small.

Now it's growing every day. So I think as we proceed on, it goes back to how these contracts are portrayed. If they're viewed as, hey, it's a little entertainment, it's a way of keeping you engaged in current events, it's a way of giving you a little bit of distraction on a very heavy topic. That's a very different ad than saying, "Oh, this is an investment tool, this is a way to hedge financial losses, this is a way of figuring out where we're headed."

All the proponents of prediction markets say this is the best way of sizing up the wisdom of the crowd in real time. This gives us valuable economic, political, sociologic information about how people view a topic. OK, that's interesting, right? But it doesn't take into account still this other very, very real possibility where people who, again, are desensitized to money, who are motivated mainly by financial gains and are really hurt by financial losses, who then act out on those financial outcomes.

And I think that's what you're getting at, is again, will we see an uptick in violence? Will we see more insider trading? Will we see more corruption? Will we see more malfeasance around contracts that are essentially meant for what? If they're meant for entertainment and sport, it's very different than meant for making money.

BRODIE: Well, so what will you be watching for in these lawsuits — both the one that Kalshi filed against the state of Arizona and the one that the state of Arizona filed against Kalshi. What will you be looking to see? What will be interesting to you about those?

FONG: Well, and you know, as just a civilian, it's just fascinating and curious to see how the law leads us down to the intersection of business and gambling. As a physician, it's about what kind of world are we going to create? You know, right now, part of the problem we have with developing a lot of gambling addiction, it's just too easy.

So what I'm really looking for, how do we protect the folks who are most vulnerable? I'm looking at for ... I'm really looking for guidance from the adults in the room for science-based legislation so that we have products that are essentially, it's supposed to make people's lives better and not make it worse.