A Recipe for Disaster’: Why One Professor is Sounding the Alarm on the Ethics of Prediction Markets
Posted on: May 9, 2026, 03:16h.
Last updated on: May 11, 2026, 04:06h.
- A leading academic warns that the current explosion in prediction markets is engineered to create a new generation of losers
- Major questions are being raised about whether these markets are truly a level playing field or a rigged game for retail traders
- Young men are squarely in the crosshairs, bearing the brunt of a high-stakes surge in digital gambling and sports betting
The deck may be stacked against everyday traders: A new analysis reveals how prediction markets and sportsbooks are rife with ethical loopholes that punish users through no fault of their own.
In a new report, Hersh Shefrin, a faculty scholar at the Markkula Center for Applied Ethics at the Santa Clara University’s Leavey School of Business, points out that prediction markets and sports wagering have to ties to “the concept of fairness as a claim to entitlements.” That may be lost on many of the retail participants that are so active in these markets.
Shefrin notes the weakest of the seven entitlements is freedom from coercion. Said differently, betters and traders enter those arenas of their volition and on the basis that they’re knowledgeable of the risks.
Next comes fairness as freedom from misrepresentation,” observes the academic. “According to this entitlement, prediction and betting markets are deemed fair if the information provided by these markets is completely truthful. Here buyers need not beware that the market is providing them with false information.”
That gets into the entitlement to equal information, which implies all market participants are on equal footing when it comes to information, but that’s not the case and a recent spate of insider trading cases involving prediction markets confirms as much.
Unfortunately, there’s doubt around operators’ ability to stem the tide of trading on nonpublic information on yes/no exchanges.
Impulse Control and Technology Matter Too
While there’s ample debate on this issue, the reality is a plethora of research which indicates a significant percentage of retail traders on prediction markets lose money.
That gets into the entitlement to equal processing power, which implies prediction markets are fair if all participants are operating on comparable technological, but the reality is something different.
Retail traders are going up against sharp bettors with the financial firepower to purchase vital third-party data as well as market makers with tech assets usually not available to the general public.
That disadvantage can make it difficult for smaller traders to realize the entitlement of transacting at fair prices. Those with the best technology can get the best pricing on event contracts while the smaller fish are left hoping they’re getting fair pricing on derivatives.
Shefrin also examines the entitlement to freedom from impulse, which is particularly important at a time when critics assert the prediction market and sports wagering industries are targeting specific demographics, namely young men.
“According to this entitlement, prediction and betting markets are deemed fair if there are paternalistic guardrails to prevent parties who suffer from gambling addiction from harming themselves,” notes the professor. “This entitlement also includes the right to be protected from predator advertising campaigns. These campaigns lure gambling addicts with messages about the ease of making winning bets and using winnings to pay rent and other necessities.”
Fairness May Be a Moving Target
Bottom line: there is debate about the fairness of prediction markets and it’s one recreational bettors and traders should pay attention. Shefrin says that given the current state of affairs, the best-case scenario is that prediction markets can be considered fair because parties are entitled to “receive truthful information.”
That may not be enough for critics arguing that prediction markets and sports betting are exploiting retail traders’ flair for risk-taking.
“Dopamine production associated with risk-taking is big business, and not just on prediction markets. There is currently a surge of risk-taking underway in the stock market,” concludes Shefrin.
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