Prediction Markets and Pricing the Future (with Kalshi CEO)

Transcript

And people have tried this before. Intrade, >> there's intrade. >> Augur. >> There's augur. >> It's an idea that's been around for a while. >> Like historical patterns. I think people really drastically overweigh historical patterns. The way that these things happen is actually an anti pattern. Usually like the biggest outcomes in in companies always have a weird thing that has happened for as as a first that hadn't happened before. [music] Tar, thank you so much for being here. >> Thanks for having me. I'm excited.

>> All right. So, uh, I'd like to start with what is the biggest misconception that people have about the problem you're trying to solve. >> I think a lot of time people conflate what we're building with gambling. I think the history of financial markets actually if you look at any of these asset classes when they got developed, people conflated them with gambling. And the reason is because people speculate on financial markets and but the the core differentiator that you know that makes financial markets different from gambling is that there is a utility there's value outside of the speculative activity and of itself right and in the case of the stock market is allocation of capital which is very important in the case of our markets is this idea of pricing the future of making humanity a little bit smarter about who's going to win the next election if inflation is

going to go up if an earthquake is going to hit a certain city and so on and so forth and that's that makes our markets financial markets and not gambling >> and right now you aren't doing anything related to crypto but you have some designs potentially to incorporate it. >> Yeah. >> Could you elaborate on that at all? >> Yeah. I mean the way we think about crypto and I think over time in increasingly more fintech companies like us will will think about crypto is is a little bit like AI. Most companies are not AI companies but over the next decade I think most companies that are going to do well in tech or or survive are going to adopt AI in some parts of their stack. it's going to be embedded in their product whether the developers are using it or they're in including it

in the product and so on and so forth. For us the frame that we think about crypto um with is the same as a technology. I think the blockchain um has a number of advantages over traditional rails. Um and we are going to fully utilize those advantages over the next few years uh to basically provide a better customer experience. um move money faster, move money much uh more cheaply um and then enable I would say overall more transparency or openness to enable like developers and ecosystem builders to build on top of Cali over time and and I think there's no place or system that's better than uh the blockchain or crypto to do that.

>> Certainly a lot of fintex now neo banks are adopting things like stable coins to sort of instantly go global uh in a way that you couldn't potentially before. you had to like build all these local integrations, but now you can kind of like from day one just go everywhere. >> Um I know you recently launched in a whole bunch of different countries. Yeah. >> Um tell me about that. Tell me about what's happened where you are now and what you've learned. >> So crypto has been a key part of our go to market strategy internationally and it's a little bit counter count kind of intuitive because usually people start with like fiat and like credit cards and whatever and then they move to stable coins. actually we started in the opposite direction and I think maybe over time we moved to the uh to the more

traditional uh modes of payment because of how easy it is to basically adopt stable coins. It really is the the fastest, the simplest. You can go global immediately in a number of countries without having to worry too much. Like this is what happens when you have an ecosystem that's sort of developerled, which is what's happening on chain or crypto. It is an ecosystem that's developerled, right? Is that things move like progress really fast like now you kind of have a startup or a company or product for any type of problem you have. And like now converting in and out from stable coin to any local currency is is not a very hard problem. Now there's like a lot of people that are solving that problem. But for now, we're launching it for 140. we'll see where there's the most demand and then we'll double down on the countries where

there's the most demand. >> So, you talked a little bit at the start about uh how some people misconstrue that using a prediction market is like gambling. What do you say to people who don't get it? Like how do you win people over who aren't persuaded? >> Yeah, I mean I I've been thinking about this a lot. That's a good question. And and by people, I think you can think of it as like there's sort of like consumers that you have to win over, there's partners that you have to win over and then over time you have to win over policy makers in Congress. And I I think of it a little bit as like when you look at a history of sort of technological disruption and and and I think that often times when there's a new type of technology that fundamentally threatens or disrupts an

old business model, there's quite a bit of critical voice that that often happens and you've seen it with Airbnbs and hotels and like the hotels have had kind of sort of like really rallied up quite a bit of opposition to Airbnb and obviously Uber is one of the the main examples with with the taxis and there were a lot of arguments for why Uber is horrible on Airbnb is horrible. And but the thing that won the day there is that consumers were actually starting to use Airbnb more than hotels. And and the thing that won the day with Uber is that consumers were using Uber more than taxis. And so the ultimate way to kind of win the public narrative is actually just keep growing, keep building a great product and keep gaining consumer share, which I think we've done pretty effectively this year. And as people use

Couch increasingly more, they realize like actually this is more transparent, they get better prices, and they get a bit more fairness. There's like the ex beauty of an exchange like an open ecosystem where I can trade against you and you can trade against me where there's no house is that it's just more fair. There's no conflict of interest. We make money whether our customers lose or win and we don't have any we're kind of a neutral platform for people to participate and and I think that's going to win the day over time. >> Now you've put a lot of resources toward doing this in a compliant way uh that is consistent with you know regulations that are on the books. Maybe you could speak to that. You know, when we first started the company, I started thinking about the idea with Lana in 2016. For

two or three years, it was kind of like, you know, haunting us. Um, uh, >> and people have tried this before, like there was intrade. >> There was intrade. >> In the crypto world, there was augur. >> There's intra, there was augur. >> It's an idea that's been around for a while. >> There were like research projects as well, like Iowa and and in the 90 in the '9s and then predicted in the in the 2010s. And we actually didn't come at it from prediction markets. We came at it as like you know in 2016 when I was at Goldman all the demand was like we want to trade on events like yeah people care about stocks and options but it was like I want to put money on Trump winning the election or hedge against that and this was where something clicked is like well

what if you just build a financial market for that like you can trade Trump odds or Brexit odds or you know weather tomorrow the same way you trade a stock there's no reason not to and then realized like actually the key problem is it was unregulated or illegal so we decided that you know in 2019 we're like okay we're going to define this core principle in the company is regulatory first and there were two reasons for why we did that one is for this to go really mainstream the way that it's going right now we had to do it regulated I think in financial services and healthcare if you don't there's a bit of a curse of scale the larger you get the more the more regulators will shut you down or or even more importantly the like higher the likelihood of something going wrong

>> really bad and we've seen it over and over with financial services and so if if you wanted to get mainstream and get institutional adoption That was critical. And then number two, I think there's a little bit of philosophical principle which is like what kind of company do you want to build? Like there's many ways to make money. I often say like I think building a company and going through all the things that a company requires to succeed is cannot be about money. Like it just can't. And so when we projected out the next decade is like what is this the type of company you want to build and and the types of companies that we looked up to are like the Coinbase and Robin Hoods of the world, not sort of offshore companies and so on. So we defined that principle and actually that cost us we took four

years to get launched. All we were doing is legal and regulatory work. So it was brutal. It was it was very very difficult to stick to that principle but it was totally worth it to stick with it because you know now uh after we legalize it and launched we basically have gained we be we gained market leadership pretty much instantly. So it was great to see that play out. >> You talked about um when you were at Goldman you had a desire to you know to want to trade on some of these eventbased things. My question to you is we've got an economist on our team who uh who has raised the point like if you are betting that say there's going to be a war in the Middle East or something.

You could go on a prediction market and you could place that bet. But maybe you could also just sort of bet in a commodities market on the price of oil like which direction that you would expect it to go. There's going to be war. Maybe the oil is going to become more scarce. So you might place your bets accordingly. There are these sort of ancillary markets where you can get exposure to these ideas or or what would be influenced by the event. Yes. >> What's the advantage of betting on the event itself versus these other areas? >> I think that's a great question. I think it's directness. When I go back to the example of, you know, wanting to get exposure on Trump, there are many ways to do that. You could, you know, figure out what the impact of Trump is on the S&P or what the impact of Trump is on uh

interest rates or a variety of different things. and and actually in that summer the most popular trade, the Trump trade was shorting the S&P. That was what the consensus was. So they were right about Trump winning. >> This was the first uh first >> 2016. >> Yeah. >> They were right about Trump winning and then they lost money because it's hard to actually figure out what's priced in and what's not in in in these markets like you don't know what the market reaction is going to be and sometimes things could happen that are maybe unrelated to the to the view that you had. So Kashi, we don't do war. We're we have a regulated status so we don't do war terrorism assassination violence so things that could incentivize bad actors. But I'll take that example like you could take a position on oil and maybe war happens but then something

completely unrelated to war, you know, depresses oil prices that you may have not expected. And so the point here is that a stock is a combination of multiple factors and often times you have a view on one factor. Prediction markets let you just trade on that one factor without taking all the others. So it's much more direct and uh much more specific to that trade. >> So just tying a few threads here, you talked about not wanting to be like some of these offshore company examples and then also you mentioned the Trump trade. So it just it comes to mind Sam Bankman Freed the >> founder of FTX who uh we all know what happened there. Very famously he was working at Jane Street before he started FTX and he his big >> then quote unquote claim to fame was

betting on the Trump trade in the wrong direction. in the wrong direction >> and so yeah just to your point he uh he missed that one and then he also missed the regulations thing later on. >> Yeah. Well, we didn't want to do that uh you know as a company. I mean I think things happen in more delicate and subtle ways uh in financial services and healthcare because these are the examples where you've seen really bad examples of of catastrophes right in healthcare obviously have the Elizabeth Holmes example and in financial services I would say the notable one I mean there's a lot in financial services that happens all the time but the notable ones are are are obviously uh Bernie Maidoff and and Sam Beckman Freed things are a little bit more subtle so like I don't necessarily believe that Sam had like really bad intent like I don't

think he was trying to you know defraud people or anything like that. I think he was trying to build a business. But when the foundation is shaky and you don't have a really strong regulated foundation, very small little mistakes can compound very quickly without oversight. And what regulation does is it sort of gets you decades of experience that is looking over your shoulder and saying, "Well, that one you have to be careful. So slow down, do it that way." Even if you don't see why you should do it that way, you know, take the extra 3, four months, do it a little bit slower, but do it in that certain way. so that in the case of a really bad outcome, you're still protected. And I think that helps quite a bit in times of of of distress. And so if you want to build for longevity, I really do think

that in the short term, it's much harder, but in the long term, going the regulated route is is really the ultimate way to succeed. >> You mentioned that there are a few events that you are that are off limits on the platform. How do you prevent a market from encouraging one of these outcomes? Like maybe you have, okay, war is off limits or something, >> but how do you prevent something from encouraging or inciting one of those outcomes? You know, for just as like a most basic example, like if you're betting on an election, who's going to be the winner of it? Maybe somebody places a bet on the person who's the underdog and then the other person, you know, >> gets like assassinated by anyway.

>> Yeah. How do you prevent something that is an okay contract from turning into something that could be a >> morally reprehensible one? >> Yeah, it's a great question. I mean, this is about market design and this is why this is hard and this is also where the regulated sort of nature of our business comes into play. Like we put a lot of thought and effort into developing our markets and to make sure that like they're economically useful, but also that they cannot create bad incentives like manipulation inside of trading or outright just going and trying to influence an event in a certain way. And for example in the election market we actually or any of these markets we have um death carveouts.

So actually like in the case that like one of the candidate dies you don't actually get paid out on the no or you don't get paid out on the other uh in the way that you thought you were going to get paid out. It we keep it orthogonal >> becomes null and void. >> We basically keep it orthogonal to what your outcome could be. And that's very important to basically avoid these types of situations where people could do something like that. Then on top of that there's like all sorts of layers of checking. So, as a regulated platform, so we we do KYC, we know who's trading, we vet them, we know who they are, uh we check for any weird types of patterns. So, you know how the New York Stock Exchange often like flags traders like, oh, Goldman Sachs trader was charged for

insider trading or something. So, there's like quite sophisticated systems that we've built over the years that monitor trades and detect any unusual patterns and then that goes through our investigation team that can that basically runs daily investigations on like people, are they doing something weird? Is there maybe insider training going on here? manipulation going on. And the neat thing about when people try to commit fraud, they don't usually do it for $100. They do it for larger amounts. And the larger the amount, the easier it is to flag. And then, you know, it's a real financial market, so the penalties can go from fines all the way criminal prosecution for people committing fraud on the exchange. And, you know, we've we've done a really great job at policing and modering. And, you know, our exchange has been really clean uh since inception. So, we're very

proud of that. After the last presidential election, a lot of people were wondering whether prediction markets would have staying power, whether they would sort of fizzle and fade after or that maybe they could only have that sort of presence at these giant moments that everybody's paying attention. Um, and it seems like that has not been the case. That's not what has borne out. You guys have been getting incredible uh growth recently, even in just the past uh couple of months. Yeah, >> our view has always been that the election market would serve as a catalyst to the chain reaction. So, you know, we're a marketplace, so we have this sort of liquidity effect and network effect piece where like the lack of it depresses it even more. So, low

liquidity begets even lower liquidity or and high liquidity gets higher liquidity. So, you have like a vicious cycle that can turn into a virtuous cycle really quickly. And to move from the vicious to the virtuous cycle, it's a bit like a chain reaction. You need a very strong catalyst, a really strong one. And we've always believed that the election would be that catalyst because it's super mainstream. A lot of people care. It can help people get educated about the product very very quickly in a very intense short period of time. And then a lot of people coales and bring enough liquidity on the marketplace to get it up and running. And then after they get on boarded, after the query surges, now you have you have the chain reaction. Now you know the thing is running and the thing is working. And so that worked like we were right about

that. And so you know once that happened you saw all the categories grow like year over year all of our categories are up 30 40x right and obviously we launched sports which is growing a lot and and you know we parlayed that with the election and then we now have like are entering into more and more categories over time people underestimate how hard like underestimate how hard it is to get up and running and then they underestimated how fast it grows once it's up and running with marketplaces like these. >> Yeah. I think it's it's kind of ironic if you were betting on uh on prediction markets themselves, like their success, uh you probably could have made a bunch of money by betting on them uh being successful because it was sort of an underdog kind of situation. People were thinking they

>> Yeah. >> Well, that's well that's what VCs do, right? >> Yeah. Well, that's the business. >> Yeah. [laughter] >> Um >> what's something that you thought you knew that you have had to revise your opinion about over the course of your work on Khi? When we started working on Koshi, we had a very narrow read of sort of like legality and and and what it means to be legal or regulated and other things which was sort of like what does the law say and that's sort of the what matters. And I think that is true but I think the equation is actually more holistic and more complicated than that. Like I think what we've learned over time is that policy really matters and policy is dictated by less what you think intuitively should exist versus not and more by like this sort of aggregation of like hundreds or

thousands of interests that are sort of bumping around against each other in DC which becomes this really complicated sometimes kind of like depressing problem because like you know you realize that actually the way that decisions are made on the policy front is actually mostly like a series of compromises. is we want to make this group happy and maybe this group a little less sad and like you're sort of rather than like what's the direction we should take as a country and how do we actually win or how do we progress. So, so that was one that like maybe at face value it's not like necessarily I didn't know but like you have to kind of really be in it to really fully grasp the dynamics of that >> and and they're quite complicated. The second learning I think is like and I think you see this with companies like

Coinbase. You see this with companies like um you know healthcare companies like that have you know waited all the way to get FDA approval. you don't get a lot of bonus points in the public opinion for doing the right things from a regulatory perspective, right? Like FTX was really very exciting for a while whereas Coinbase, you know, was moving slower because they had to for regulatory reasons, but then you would get a lot of credit in the times where it really matters the most, which is sort of, you know, maybe it's like one year out of the decade is a time where things go south and like the difference between regulated, unregulated actually like goes really really large. And one of it is like Coinbase now is a hundred billion dollar company and FTX is >> you know FTX.

>> Yes. >> Right. So um but in the normal course of business like it actually you don't feel it as much. It doesn't seem like there's a difference. It only matters in the tail tail events. >> So I'd like to ask you a series of rapid fire questions. Lightning round. >> That's right. >> All right. What's the worst piece of advice you've ever gotten as a founder? It's it's along the lines of like like it really is along the lines of like well this hasn't like the sort of reasoning via patterns. This has this hasn't been done before and thus it's it's not going to happen. >> And the counter to that is actually you have to ask why you have to go back to first principles if you want to do if you want to enact meaningful change. And that's what happened with Kali. It's

like we would just ask well why doesn't it exist and they're like they give a set of reasons well like it's not first principles like I need to understand mathematically why this shouldn't exist in the world and once I prove why it shouldn't exist then fine I'm convinced otherwise I think there's a there's a way to make it work >> because people could point to all these examples that it didn't pan out >> exly yes like historical patterns for starting companies I think people really drastically overweigh historical patterns >> the way that these things happen is actually an anti pattern usually like the biggest outcomes in in companies always have a weird thing that has happened for as as a first that it hadn't happened before.

>> Yeah. We talk a lot about the idea maze here which is sort of like you have to understand the the historical development, the pathways people took, the dead ends and why they were dead ends and yeah, >> what doors might be revealed in that maze that other people didn't access or didn't see. >> Yeah. There's like a lot of path dependence to things. >> Yeah. >> Right. like you need kind of this narrow sequence of events to happen for something to work and often times like yeah you you can fall off the cliffs as you go towards the idea but that doesn't mean that there isn't a path the path is the path is narrow and it's tight and it's very long but there is a path right and I I think reasoning by analogy like historical analogies is not is not very effective for for companies in my

opinion >> what's your biggest productivity hack >> you know I'm not very productive like [laughter] it's like you know >> I mean it seems like you are based on how things are going >> but it's interesting like you know We so um Lana, my co-founder, should be giving better advice on this than I would because she's more the operational executional one. I I'm a bit more kind of the wandering thinking strategy type. Like I go deep in problems and like I'm a bit messy and and or you know disorganized. So she would have better advice on that. I I what works for me I I like working on weekends a lot. Like I I think the bulk of my week gets done on the weekend. So I don't know maybe work at times where nobody's going to ping you.

>> I wholeheartedly agree. I love a Saturday work session because nothing can interrupt you. >> Yeah. Like you just No one talks to me on Saturdays, so like I just get the most work done. >> But Sundays are sacred for me. I don't know. I just >> Yeah, I work on both. >> Okay. Well, >> yeah, [laughter] >> that's definitely that'll help you be twice as productive for sure. >> Um, what book would you recommend people read? >> I like the score takes care of itself a lot and I really feel like we try to do that with the company. Like there's a lot of variance that you don't don't have control over and you know and short-term volatility. that if you build the right set of processes in a company or the right set of habits, like if if you do 20 reps of abs in the morning

every single day, like you're probably going to be, you know, reasonably fit over a decade, right? Like, and so I think focusing on this sort of process and like really starting to enjoy it, I think is is probably one of the best indicators of long-term success as long as you're in like big enough market and and good market. So, the score takes care of itself, I think, is really up there. Great recommendation. What is the smallest hill that you will die on? >> Smallest hill that I've >> smallest hill. >> Interesting. That's a good question. Like something that's not super relevant basically. And I'm just like really I really feel strongly >> but is very relevant to you.

>> I don't know why I really dislike the idea of kombucha in the office. >> Kombucha. >> Yeah. I think it's one of those like things that are like correlated with a company becoming large and slow and and sort of chill. >> Other beverages are okay. >> I think it's specific to this one. >> Uh I I feel pretty strongly about that. >> Do you have any beverages in your office? >> Well, we have like you know we have anything but right like Yeah. >> Okay. But there will never be kombucha off limits. Not >> that would be a bad sign. Like that that would be sort of a top signal.

[laughter] >> Amazing. All right. Well, Tar, thank you so much for your time. >> Thanks for having me. This was awesome. [music] [music]