In the prediction market industry, a common narrative is that traders are rewarded for identifying mispriced outcomes.

The fact that someone trading from their basement could be sharper than a Wall Street firm or an expert pollster is one of the coolest and most well known aspects of these markets.

While this is true, and why Kalshi markets are a good signal, in admiration of sharps, many overlook the fact that these markets have real utility for the vast majority of people that aren’t elite traders.

Because yes, they do reward traders that identify mispricings, but they also reward individuals who identify when they are overexposed to a risk.

Rather than having to be sharper than the market, individuals can be rewarded simply by identifying a gap in their existing risk coverage, which they know better than anyone. It’s this latter case that makes the utilization of these markets far less daunting.

A sports bar hedging against their home team losing early in the playoffs does not have a modeling edge, they simply understand that their business is over-exposed to the risk of fewer than expected games. Same with an ice cream shop hedging against rain risk, a trucker hedging against the increase in diesel prices, or a ski shop hedging against the risk of a delayed resort opening.

While a pure trader comes onto Kalshi trying to find vulnerabilities in the market, a business can come onto Kalshi with an understanding of their vulnerabilities, and then trade purely as a means of protecting itself.

In this sense, using prediction markets as a hedging tool has a lower barrier to utility than using these markets in a purely alpha-seeking function.

Justin said it best in today’s piece: “It’s really hard running a bar and restaurant business. You are so exposed to things you can’t control… Now we have a way to at least smooth out some of that risk. Honestly, it’s a really big deal."

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