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Money Over Mind

Stock and options traders are continually trying to predict the future. After all, every market decision boils down to the same question: “Will this or won’t this make money?”

But not all markets are created equal.

Investors and economists have had hundreds of years to study markets like the New York Stock Exchange, which was established in 1792. Other markets, such as event-contract prediction markets, are still in their infancy.

Originally published In Luckbox Magazine. Subscribe for free at getluckbox.com/dailyfx

It was only last July that Kalshi, the first-ever federally regulated events exchange, opened its virtual doors for a public beta. Users are already trading hundreds of thousands of shares in its largest-volume markets, each share representing somebody’s expectation for the outcome of a future event.

With more-established prediction market platforms, such as PredictIt, it’s not uncommon for trading volume in a number of markets to surpass millions of shares.

That was more than enough to catch the attention of Moran Cerf, a neuroscientist and business professor at Northwestern University. He and his team decided to construct a prediction market for a research project—not to learn what the markets do, but instead to find out what could be done with the markets. In practice, the project accomplished a bit of both.

“We thought that we can use technology to change people’s minds,” Cerf told Luckbox. “It’s hard for the human brain to think about the future, and we thought that using technology we can make it easier for us to transport ourselves to the future and imagine it better.”

They picked the topic of climate change and recruited self-described believers and skeptics. The point was to see if participating in a climate-themed prediction market would shift beliefs because the market would serve as a non-partisan arbiter of truth.

Following the experiment, some did change their beliefs, but not merely because they participated. Participants shifted toward stronger concern about climate change proportional to the amount of money they won, regardless of whether they were believers or skeptics.

“The nuance is that giving you a stock that’s contrary to your beliefs that constantly makes money does change your mind,” Cerf said. “When you constantly get feedback that your stocks that go against your beliefs are making money, you get feedback that says your beliefs are not aligned with reality and it would have been more financially rewarding for you to have the other beliefs.”

Then, gradually, you shift your beliefs without realizing it—even if your identity doesn’t change. Climate skeptics who began acting more like believers still identified as skeptics, Cerf said, “So I think the shift is not complete—it is in practice, but not in theory.”

The experiment was repeated focusing on sports instead of climate change, and the results suggested that fandom is not as closely tied to one’s identity as environmental beliefs. It’s easier to accept a favorite team losing a game than being wrong about ideological principles.

But for prediction markets to change beliefs, Cerf said, participants must accept a common arbiter of truth.

“It only works if when you lose, you accept that you lost, and if you win, you accept that you won,” he said. “And in this game, you entered knowing the rules, and you got an outcome that’s like going to trial. The jury says ‘yes’ or ‘no.’”

Originally published In Luckbox Magazine. Subscribe for free at getluckbox.com/dailyfx

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