Are Prediction Markets Casinos or Stock Exchanges?

Is investing in the stock market just like gambling in a casino?

Sometimes it can seem like it because investors and gamblers increasingly use a lot of the same language. That’s on purpose, especially on the part of the operators of prediction markets that have only gained regulatory approval to operate in the United States in recent years. The prediction market operators wanted their product to be regulated as a financial product and not as a gambling concern that could limit their growth.

In a preprint version of a paper that will be published in the American Business Law Journal next year, authors Nizan Geslevich Packin, Maya O. Shaton, Elior Sulem, and Sharon Rabinovitz used Large Language Model tools to analyze public records that capture how prediction market operators presented their business to federal regulators to gain their approval.

Here’s an excerpt from the paper that explains why the prediction market operators used language to influence regulators and describes how their word choices supported their efforts:

Participants in notice-and-comment processes do not speak randomly. They select terminology and frames they believe will resonate with regulators. In markets characterized by legal ambiguity, this framing becomes especially salient. Describing an activity as “hedging,” “price discovery,” or “risk management” situates it within financial regulation. Describing the same activity as “betting,” “wagering,” or “gaming” situates it within gambling law. Framing therefore operates not only as persuasion directed at agencies, but as a mechanism for shaping the administrative record that courts later treat as the factual predicate for review.

Here’s the authors’ main findings describing the framing of the words used by the prediction market operators to gain regulatory approval for their businesses as financial institutions, taken from the paper’s abstract:

The analysis reveals a pronounced asymmetry: of 812 submissions, 87.2% addressed economic, financial, or regulatory consequences rather than gambling-related characteristics, employing terminology central to financial discourse. Only 5.8% emphasized gambling risks or entertainment dynamics, with high-confidence gambling terminology, with the remaining 7% mixed or neutral.

The initial success of prediction market operators in getting regulated under U.S. financial regulations rather than state gambling laws raises a different question. What makes investing different from gambling?

Schwab’s Jonathan M. Craig tackled that question, noting their similarities before identifying the thing that really makes them different:

What investing and gambling have in common is that they both involve risk, and both have potential for gain or loss. But they are not the same—gambling is a game of chance, typically involving short-term bets on binary outcomes. Investing, in contrast, is often a longer-term strategy based on research and data aligned with risk tolerance and financial goals with the aim of acquiring a diversified set of assets that have the potential to appreciate in value and ultimately build wealth for the investor over time.

And to be clear, they have very different expected returns. Studies published by the CFA Institute showed that:

1. Over time, gambling always has a negative expected return. In casinos, the built-in mathematical “house edge” reliably leads to a transfer of money from players to the casino. In the long run, the house always wins.
2. Investing, on the other hand, is the allocation of capital to a business or asset with the expectation that it will generate income or appreciate in value. Over the past century, investments in stocks and bonds have reliably yielded positive returns. However, keep in mind that the past performance of any investment is not a guarantee of future returns or profits. In the long run, it is possible for both investors and the issuers of securities to earn a positive return.

So where do prediction markets really fall on the investing or gambling spectrum? Should they be regulated like brokerages or as gambling operations?

These questions have been taken on by several courts in cases involving the prediction market Kalshi after it began offering “sports event contracts”. The courts have been finding Kalshi has crossed a regulatory line that pushed it into the gambling category, where it must be subject to state level gambling regulations:

The 2nd Circuit denied requests Tuesday (Nov. 3) from Kalshi and Coinbase to block state enforcement while their appeals proceed. The order covered Kalshi’s cases against New York and Connecticut officials and Coinbase’s separate Connecticut case. In the two-sentence order, the panel said the companies had “failed to make the required showing” to justify an injunction pending appeal.

A day later, the 9th Circuit declined to rehear its August decision allowing Nevada to enforce its gambling laws against Kalshi’s sports contracts. The August panel concluded that the sports contracts fell outside the federal definition of swaps, leaving Nevada’s gambling rules applicable. According to the court, no judge called for a vote on rehearing by the full court.

In September, the 6th Circuit cleared the way for Ohio and Tennessee to enforce their laws. It concluded that Kalshi had failed to show its sports contracts qualified as swaps and that, even if they did, federal law would allow the states to enforce their gambling laws.

The Commodity Futures Trading Commission said the Commodity Exchange Act gives it exclusive authority over swaps traded on federally registered exchanges. The dispute turns on whether contracts that pay out based on a game’s outcome fall within the federal definition of a swap and whether the statute displaces state gambling laws as applied to those contracts.

Here’s a different question. Does that increasing risk to being regulated as a gambling operation by states make prediction markets a good investment?

That’s still an open question, but we do have one interesting data point for it. Online gambling platform DraftKings opened its own prediction market in December 2025. In November 2026, the company reported the high costs of building up its prediction market features is cutting into the company’s profits, which in turn, is negatively impacting stock price (NASDAQ: DKNG).

Here are two exit questions. Is that short term pain that will lead to a long-run gain for DKNG investors? And if long-run outcomes is what separates gambling from investing, what amount of time has to pass before the long-run gets here?

References

Packin, Nizan Geslevich and Shaton, Maya O and Sulem, Elior and Rabinovitz, Sharon, Finance or Gambling? Prediction Markets After Loper Bright and the Administrative Record (February 28, 2026). American Business Law Journal (forthcoming: 2027), Volume 64 Issue 1., Available at SSRN: https://ssrn.com/abstract=6900983 or http://dx.doi.org/10.2139/ssrn.6900983.

Image Credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon of a bull and bear who are trying to decide if they are in a casino or a stock exchange”.