Legal sports gambling has gone way too far

Prediction markets scored a win last week when the Commodity Futures Trading Commission asserted federal jurisdiction over the industry, characterizing the markets as basically a form of derivatives rather than gambling, which of course has long been regulated by the states.

As Stanford researchers Andy Hall and Elliot Paschal recently argued, financial markets where people make predictions about the future with money on the line can, in principle, generate socially useful information by aggregating dispersed knowledge and forcing people to precisely quantify their level of certainty in their own ideas.

On some level, of course, a “prediction market” is a form of gambling. And the most popular contracts on prediction markets aren’t betting on how long Ayatollah Khamenei will stay in power or how many measles cases there will be this year or what will happen in the Alaska Senate race (though all of these markets exist) — they’re bets on sports.

And the recent explosion in legalized, normalized sports gambling, both in prediction markets and apps, has proven sufficiently widespread and problematic to have prompted a backlash in many quarters. So at least to some extent, it seems that this move by the C.F.T.C. is trying to preempt state regulation of sports betting, even though gambling has long been regulated by the states.

I think that the idea of prediction markets has a lot of value. At the same time, the backlash against ubiquitous sports betting is largely correct.

What’s called for here is federal policy that tries to foster prediction markets while preserving states’ ability to regulate gambling on sports. In practice, the only way to do that is with a bit of somewhat arbitrary line-drawing.

But that’s fine; we’re talking about politics and legislation and rule making, not a philosophy seminar. There is a qualitative and quantitative difference between the people putting money down on their forecasts about the upcoming midterms and the people doing same-day parlays on sports-betting apps. The rule that you can’t buy alcohol when you’re 20 years and 364 days old but can the moment you turn 21 is a little arbitrary, but that doesn’t mean that drawing an age limit on drinking is a bad idea.

We need to draw a line on sports betting.

The basic reality is that there is a certain gambling-like aspect to all financial markets. Wagering on a roulette wheel and purchasing a contract in a forecasting market about an upcoming election in Nepal are in some sense the same thing. You are “predicting” how the ball will fall. You are “betting” on the election.

But capitalist countries have actually managed to police the distinction between speculative investments and games of chance for as long as financial markets have existed.