Part VII: Regulation, Ethics & the Future
Chapters 38--42
Prediction markets do not exist in a vacuum. They operate within legal frameworks, they raise genuine ethical questions, and their ultimate impact depends on choices that societies, regulators, and practitioners have yet to make. Part VII steps back from the technical and strategic material of earlier parts to engage with these broader dimensions -- not as afterthoughts, but as forces that will shape the trajectory of the entire field.
If you plan to trade on prediction markets, build them, or advocate for their use in public decision-making, you need to understand this landscape. A brilliant model is worthless if the platform it trades on is shut down by regulators. An elegant market design is irresponsible if it creates opportunities for manipulation or harm. And the most promising research direction in the field may never be realized if practitioners cannot make a credible case that the benefits outweigh the risks. This part gives you the knowledge and the analytical framework to navigate these challenges thoughtfully.
Chapter 38 maps the regulatory landscape, with particular attention to the United States Commodity Futures Trading Commission (CFTC), which has been the most active regulator in this space. We trace the legal history from the Iowa Electronic Markets' no-action letter through the CFTC's evolving stance on platforms like Kalshi, PredictIt, and Polymarket. You will learn the key legal distinctions -- between event contracts and gambling, between regulated exchanges and unregistered platforms, between prediction and binary option -- that determine what is permissible and what is not under current law. This chapter does not offer legal advice, but it gives you the vocabulary and context to understand the legal environment in which you operate.
Chapter 39 broadens the regulatory view beyond the United States. Prediction markets face a patchwork of legal regimes around the world, from the United Kingdom's relatively permissive approach under the Gambling Commission to outright prohibitions in some jurisdictions. We survey the major regulatory frameworks, discuss the challenges of cross-border participation in an increasingly global and decentralized market, and examine how regulatory arbitrage has shaped the geography of the industry.
Chapter 40 takes up the ethical questions that prediction markets raise. Should you be able to bet on deaths, disasters, or political violence? What are the moral implications of profiting from accurate forecasts of harmful events? Can prediction markets be manipulated to influence the outcomes they are supposed to merely forecast? We engage with these questions seriously, presenting the strongest arguments on multiple sides and drawing on the academic literature in ethics, economics, and political theory. The goal is not to hand you a set of answers but to equip you with a rigorous framework for reasoning about these issues as they arise in your own practice.
Chapter 41 surveys the frontier applications and open research questions that will define the next decade of prediction market development. We examine the use of prediction markets in corporate forecasting, pandemic preparedness, climate risk assessment, AI safety, and scientific replication. We review the active research threads -- market design for thin markets, integration of AI forecasters as market participants, mechanism design for long-horizon questions, and the measurement of information value -- and identify where the most promising opportunities lie for practitioners and researchers alike.
Chapter 42 is the capstone project. Drawing on everything you have learned across all seven parts of this book, you will design, build, deploy, and evaluate a complete prediction market system. This is not a hypothetical exercise: you will create real markets on real questions, recruit real participants, and measure the accuracy of the resulting forecasts. The capstone ties together market design, data science, trading strategy, and ethical reasoning into a single integrated project that demonstrates your mastery of the field.
By the end of Part VII -- and of this book -- you will be equipped not just to participate in prediction markets but to shape their future responsibly. The field is at an inflection point, with growing mainstream adoption, evolving regulation, and rapid technological change. The practitioners who will have the greatest impact are those who combine technical skill with ethical clarity and regulatory awareness. That is what this final part aims to develop.