Prediction Markets: Investing or Betting?

Prediction markets allow people to trade event contracts, which offer payoffs based on the outcome of future events. In the United States, event contracts are available for pretty much anything you can imagine, from whether the incumbent political party will lose the House of Representatives in the next midterm election to whether your favourite pop singer will still be married by the end of the year. In Canada, regulators have limited event contracts to four types: economic forecasts, environment forecasts, governmental forecasts and financial indicators.

Prediction markets are surging in popularity for many reasons, whether it's traders looking to get a feel for the "wisdom of the crowd" or platforms looking to increase trading volume from new customers. We're now starting to see self-directed investment platforms — mostly in the United States but also some in Canada — include prediction markets alongside stocks, ETFs and other investments. This raises the question of whether prediction markets are similar to investing and whether they deserve a place on investment platforms.

In this article, we'll explore the question of whether prediction markets are more like investing or betting. To do this, we'll compare investing and prediction markets, based on three attributes:

Attribute	Investing	Prediction markets
Time horizon	Medium to long horizon	Short horizon
Risk/reward exposure	Broad exposure	Narrow exposure
Expected value	Positive-sum game	Zero-sum game

Time horizon

Investing typically calls for a medium to long time horizon as investors seek to accumulate wealth for goals such as buying a home or funding retirement.¹ Longer-term investing requires patience. Most of the time, the stock market does not move strongly up or down but drifts within a range. Investing in a broad selection of stocks, to use some rustic images, can be like "Watching the grass grow" or "Waiting until the cows come home". Some decades are much better than others, with the S&P 500 index of U.S. stocks returning 13.4% annualized in the 2010s, compared to -1% annualized in the 2000s.² This shows that sometimes investors have to wait more than a decade to generate a meaningful return.

In comparison, prediction markets involve a short-term horizon. Traders of event contracts are not thinking in years or decades but are looking at events that could happen in a few days or weeks, possibly extending to a few months. This involves a quick result, likely not related to a long-term goal.

This difference in time horizon can lead to very different behaviour. Investors become used to holding, without expecting immediate results or feedback. Traders of event contracts, however, see results right away and get immediate feedback on whether they won or lost. This can create emotional highs and lows, similar to the experience of gambling. Here's the perspective of a clinician, discussing similar patterns of addiction in prediction markets and sports gambling³:

"There may be real differences in how these products are defined or regulated, but in the therapy room, we are often seeing the same cycle of anticipation, action and reaction play out again and again," said Dr. Cynthia Grant, the vice president of clinical for Birches Health, which operates a national network of providers for treating gambling addiction. I sometimes think of it like different doors into the same room. The label on the door may change, but once someone’s inside, the experience can feel very familiar".

Risk/reward exposure

Investing involves broad risk exposure with potential for varying degrees of reward. Stock investors have risk exposure not just to the companies they invest in but also to the growth of the broader economy and geopolitical events such as pandemics, wars and tariffs. Bond investors have risk exposure not just to individual governments or corporate borrowers but also to the overall level of interest rates and inflation.

In comparison, prediction markets have narrow exposure. Event contracts are tied to the outcome of a single event, with a binary outcome. Either the incumbent party wins the House or they don't. Either your favourite pop singer is still married at the end of the year or they're not. Maybe this sounds good. Why take on a broad set of risks when you can just focus on a single risk? Yet it turns out that investors in diversified stock and bond markets tend to be rewarded for accepting a hodge-podge of risks. For example, stock market earnings might decline — bad for investors — while at the same time the risk of a trade war might decline — good for investors. Investors can be rewarded for a variety of reasons, while traders of event contracts only have one path to a payoff.

Expected value

Investing has a positive expected value over the long term. Stock investors expect companies to earn profits, while many companies also pay dividends. Bond investors expect issuers to pay interest and repay principal. Investors can estimate how much they will be paid over the long term and then decide to invest if today's price is reasonable in relation to the expected future value of the investment. Long-term investing is generally a positive-sum game because companies create wealth.

In comparison, prediction markets have zero expected value. Buyers and sellers of event contracts together make a market and set the price of contracts. The prediction market platform pools funds for both sides of the trade and pays winners from losers, while collecting a fee in the process. The result is a zero-sum game: one trader's win is another's loss. And that's before the platform takes its fee. After accounting for the platform's fee, the net result of prediction markets for buyers and sellers is a negative expected value.

How do you cash out? This highlights the difference between prediction markets and investing. With prediction markets, the trader of the event contract can either sell before expiration or cash out at expiration — in this case, a winning trade is paid from the pool of losing trades.⁴ With investing, however, it's not necessary for one investor to lose in order for another investor to win. Investing can be a positive-sum game, where it's possible for you to make money from holding an investment and then sell to another investor who can also make money.

Thinking about expected value assumes a fair market, where both buyers and sellers of event contracts have similar access to information. It's not clear this is how prediction markets actually operate. Based on a recent study of Polymarket, the world's largest prediction market, the top 1% of traders captured about 75% of the gains.⁵ As ever in financial markets, it's worth asking who's on the other side of the trade. Quite possibly, it's not another person but an automated, high-frequency trading bot that's much better at setting odds than any human.

Key takeaways

To return to the question of the article, are prediction markets more like investing or betting? Based on three attributes — time horizon, risk/reward exposure and expected value — prediction markets are much closer to betting than investing.

Time horizon

Investing typically has a medium or long time horizon, measured in years or decades, and is usually tied to financial goals. In contrast, trading in prediction markets has a short time horizon, measured in days, weeks or months, and is often tied to the desire for a quick win.

Risk/reward exposure

Investing involves broad risk exposure to the market and economy as well as the investment itself, which creates several potential sources of reward. In contrast, trading in prediction markets involves all-or-nothing risk and reward, based on a single outcome at a single time.

Expected value

Investing in broad stock and bond markets over the long term is a positive-sum game. Investors can typically sell to a large number of other investors, including scenarios where all participants benefit. In contrast, trading in prediction markets is a zero-sum game, where one trader's win must be another trader's loss.

Notes

¹We define investing as holding assets to build wealth over a medium to long time horizon, while accepting some risk of loss. This definition of investing does not include activities with a shorter time horizon, such as day-trading or saving in cash-like instruments.

²Total return of S&P 500 index in US dollars, 2000-09 and 2010-19 Opens a new window..

³ Prediction markets say they're different from sportsbooks. Gambling addicts say it's all the same. Yahoo Finance, May 1, 2026 Opens a new window..

⁴ Like options, event contracts can be traded prior to expiration and become worthless at expiration. However, options differ from event contracts in two ways. First, options are tied to the price of a productive asset, while many event contracts are not. Second, options can play a role in a portfolio, such as to manage risk with a put option or to target income with a covered call strategy, while it is not clear that event contracts would play this kind of role in a portfolio.

⁵ Who Wins and Who Loses In Prediction Markets? Evidence from Polymarket. Social Science Research Network, paper last revised May 1, 2026 Opens a new window..

Prediction markets: Investing or betting?

Time horizon

Risk/reward exposure

Expected value

Key takeaways

Time horizon

Risk/reward exposure

Expected value

Notes

Knowledge is your most valuable asset

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