The future of stock market investing isn’t the stock market.
On Monday, Robinhood (HOOD) announced it was launching prediction markets, allowing users to trade the outcome of events, with this week’s Fed meeting and the NCAA tournament serving as the first two markets at launch.
Last month, readers might recall, the company sought to launch bets on the Super Bowl but later withdrew that plan.
A month later, it seems the company has the answer for regulators.
“The prediction markets hub — and corresponding contracts — will initially be available across the US through KalshiEX LLC, a CFTC regulated exchange,” the company said in Monday’s release.
“We have been in close contact with the CFTC over the past several weeks and look forward to continuing to work with them to promote innovation in the futures, derivatives and crypto markets.”
So with the regulatory machinery hammered out and the company finding a better partner for its latest initiative outside of stocks, Robinhood appears to be signaling that the future of stock market investing is actually sports betting.
As Bloomberg’s Matt Levine wrote back in February:
There are two basic mental models one can use when investing in the stock market — no one knows anything or everyone knows everything.
Both, taken to their extremes, form a firm backing for doing what most research suggests most people should do with most of their investments: park them in a low-cost index fund and then do something else with their time and talents.
For professional investors, both of these models also offer plenty of reasons to go on trying to beat the market. Surely, not everyone can know everything, and someone must know something. Why not us?
But for both the retail investor and the companies that serve them, a regularly reinforced message that the best way to do something with your money is to do nothing will eventually see these relationships fall off in both directions.
Companies cannot acquire users and count on them to remain customers through years of inaction. And few customers of any business, no matter what they are “supposed” to do with the product, will remain as such if there’s no reason to remember they’re a customer.
All of which helps to outline the appeal of prediction markets as a middle ground of sorts.
They resolve quickly. They are discrete. And while leverage can be applied to any wager in creative ways, there aren’t (at least not yet) options on these derivatives.
In its paper arguing for the value of offering prediction market contracts, Robinhood writes, “The combination of risk mitigation, information aggregation, speculation, and learning potential makes prediction markets a valuable economic and informational tool for businesses and individuals alike.”
Which, sure.
And speaking of things everyone knows, the modern US economy is highly financialized, but most participants are unable to hedge their risk. (As a W-2 employee with a mortgage and a 401(k), I’m actually levered long my local housing market, the online media industry, and the US stock market.)
So: does this new product offering change the risk profile for the majority of Robinhood’s users, many of whom are likely exposed to the same leverage as this post’s author? Probably not.
But what it does signal is that the stock market’s role in the average person’s efforts to improve their financial standing or de-risk their financial assets is likely to decrease over time.
“Democratizing” things like private equity and venture capital fit in this bucket, of course.
And placing a yes/no bet on all 67 games set to be played in the NCAA Tournament doesn’t exactly scream “de-risking.”
The stock market is often discussed as a solved problem — much like baseball, with its three true outcomes — but if the known correct action is, as mentioned above, to buy the basket and do nothing, then both the business strategist and human nature biases toward action must be allayed somehow.
At least sports are fun.