Prediction Markets Reward Insider Trading. They Should.

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Prediction Markets Reward Insider Trading. They Should.<br>There are downsides to prediction markets, but most people miss that their point is to reward insiders for coming forward with beneficial information only they have

Jimmy Alfonso Licon<br>May 27, 2026

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About the Author

Jimmy Alfonso Licon is a philosophy professor at Arizona State University working on ignorance, ethics, cooperation and God. His forthcoming book, Better Not to Know: Why Knowing Less is Sometimes Best, is with Peter Lang Publishing. Before that, he taught at University of Maryland , Georgetown , and Towson University . He lives with his wife, a lawyer, at the foot of the Superstition Mountains. He also abides.

This is my latest piece from AIER Fusion . You can find the original article HERE .

A few years ago, I met the economist Robin Hanson, one of the architects of prediction markets. Over lunch, Hanson made a remark that I have not been able to shake: stock markets punish insider trading; prediction markets reward it.<br>The line sounded, at first, like an admission of something nefarious. Insider trading is normally frowned upon, and even punished, because it can distort markets and disincentivize investing by outsiders. But after thinking about it for a bit, I realized that insider knowledge is the whole point of prediction markets. Unlike with the conventional stock market, the goal of prediction markets is to incentive people to broadcast their insider knowledge. Their winning bets are a way of making that information more widely available.<br>That memory was made new again for me by recent news that the Department of Justice is charging an Army soldier with five felonies for allegedly betting roughly $33,000 on Polymarket that a raid to capture Nicolás Maduro would happen. The raid occurred and the soldier cashed out around $400,000. Kalshi, another prediction market, suspended the accounts of candidates for office who bet on their own races. Both platforms are scrambling to bar insiders of various kinds from trading on contracts tied to their work.<br>Apparently, almost no one in the policy world has absorbed Hanson’s insight: that prediction markets are useful because they make knowledge more widely available. That worthy goal is impeded and disincentivized when people who provide such knowledge are banned from the platform and punished by the government.<br>To see why insider trading on prediction markets is a feature rather than a bug, it helps to begin with a question about the meaning of “knowledge”. Most of what any of us takes ourselves to “know” about the world is acquired through testimony from other people who, presumably, know better than we do. Whether the topic is monetary policy, the safety of a vaccine, the timing of a military operation, or the likely outcome of a Senate race, nearly every bit of knowledge we have comes from others who are better placed to know than us.<br>The social character of knowledge means that the structure of incentives facing those who hold information matters as much as the information itself. The used car salesperson typically knows more about the car than the buyer does. His expertise is real, but his incentive to faithfully convey that information is weak. The public expert and the salesperson differ less in what they know than in why they are talking. Public experts get rewarded when they share their expertise, like a geologist who wins acclaim, a more prominent appointment, or perhaps a raise after they successfully predict a volcanic eruption. The salesperson lacks such incentives, at least if sharing too much of what they know would impede the sale, as when they know that the car they’re selling is a lemon..<br>Almost every problem of testimony, from cable news to peer review to political speech, reduces to some version of this incentive asymmetry.<br>Most of our institutions for producing public knowledge handle the incentives problem badly. Politicians and bureaucrats can face career penalties for being right at the wrong time . Perhaps the most famous example is Winston Churchill, who warned for over a decade about the threat that Hitler posed to the world. They rarely face any penalty for being wrong when they agree with the herd. Consder the many politicians who favored the War in Iraq with little consequence to their careers. To give another example, scientists are supposed to be immune to public pressures. Yet they work inside reputational economies that reward consensus more than calibration.<br>Journalism, at its best, helps close the gap. But the typical reporter has limited ability to verify the claims of official sources or to compel disclosure from those who...