I’ve lived in Lawrence, Kansas, for almost exactly forty years now. I know this because we are at the tail end of the 2026 World Cup. When I moved to Lawrence, we were right in the midst of the 1986 version. Times have changed, and the tournament has changed. I didn’t expect the 2026 World Cup to send me down a rabbit hole about prediction markets, probability, and business valuation, but here we are.
Lawrence has quite a bit more history with basketball than with soccer. “The Original 13 Rules of Basketball” are housed at the DeBruce Center, attached to Allen Fieldhouse on the campus at KU. This building is literally right across the street from the School of Business, where I do my best to influence the thought processes of MBA candidates and undergraduate students. The founder of basketball and author of those rules, James Naismith, is buried in Lawrence. So is Forrest “Phog” Allen, basketball coaching legend and the person for whom Allen Fieldhouse is named. We love our hoops in Lawrence, but soccer was my sport of choice before moving here.
With the US hosting the World Cup in 2026, soccer has been top-of-mind for many of us in the Kansas City area, including Lawrence. The stadium in KC has hosted a handful of games. Argentina, England, and the Netherlands have all had base camps in Kansas City, and in fact, the national team of Algeria had their base camp right here in Lawrence. It isn’t for everybody, but I love watching soccer, and especially the unrivaled drama of the World Cup.
Because I won neither the ticket lottery nor the actual lottery, for me that means watching the games as they are broadcast. Sporting events bring us all together, don’t they? They give us cultural touchstones. If you’ve watched the same games I’ve watched, you’ve probably seen the exact same commercials I’ve seen. One of the more bizarre entries features Timothee Chalamet in the middle of a dental procedure. He is trying, unsuccessfully, to articulate the word, Kalshi, to his dentist. This is the first of a three-part series featuring Chalamet:
What the heck is Kalshi? It’s a prediction market. There are several similar markets, including Polymarket and Predictit. You can access prediction markets on crypto exchanges Coinbase and Robinhood. From what I recall, these prediction markets appear to be based on the Iowa Electronic Markets (IEM), which I learned about in the 1990’s thanks to one of the most influential professors of my KU experience, Mark Hirschey. Don’t ask me why, but after seeing poor Timothee Chalamet try to enunciate the word to his dentist for the fifth time, and with at least a couple of minutes left in the “hydration break,” I decided to look at the Kalshi app on my phone for the very first time. As a Certified Valuation Analyst, I couldn’t resist! The rest of the world may see a gambling parlor, but I was very curious to get under the hood and see how such a vehicle considers and prices uncertainty and risk.
I’m not sure why it took me so long to explore these prediction markets. Again, I’ve known of the concept for decades. It has been thirty years since I took a class from Professor Hirschey, one of the best to ever do it, may he rest in peace. I’m a little bit too old to be classified as a digital native, but I might have a decent claim to be nearly blockchain native. I bought my first Bitcoin in 2014 and my first Ethereum in 2016, so I’ve been curious and active in the space for more than a decade. (There is nothing quite like buying early and buying low.) Polymarket is built on crypto rails. Coinbase and Robinhood are certainly part of the cryptosphere. Maybe I should have taken a closer look prior to 2026, but here are a few thoughts from this valuation analyst about prediction markets based on my recent observations and experiences. There are some similarities and also some differences between prediction markets and the world of business valuation.
Prediction markets attempt to price the probability of certain outcomes.
For a simple outcome, imagine that there are only two possibilities. Will the Federal Reserve cut rates at their next meeting? A “yes” contract will be worth $1 if they cut rates, and $0 if they don’t. If the “yes” contract is trading for, say, $0.40, then somebody is willing to pay $0.40 for something that is worth either $1or nothing at all when the event resolves. Somebody else is willing to pay $0.60 now to receive $1 at resolution if the rates are not cut. But here’s the trick. These contract prices are not static at all. They move constantly. You are buying a probability as of a literal instant in time. If you’re watching, say, a soccer game….with a binary outcome, say, in a knockout round of the World Cup….you would see these odds change significantly when a goal is scored. Worth noting, some events may have multiple outcomes. It can be tricky, and a big part of the challenge is simply the ability to understand the contract. Yes, that is similar to business valuation. When the SBA says they want an analyst to value the business, they really mean that they want us to value the contract or the deal in question. One has to know the terms of the deal.
Consensus is not the same thing as objectivity.
The “Wisdom of the crowd” was popularized in the early 2000’s by author James Suroweicki. The principle states that aggregated estimates by independent groups of people are often more accurate than the judgments of a single expert. That is probably up for debate, and there have been a number of studies about the results and calibration of public markets. Prediction markets aggregate opinions…and also biases. In any case, this is certainly different from valuation, where a single expert or small group of experts is expected to exercise professional judgment in conjunction with development and reporting standards. Which is more reliable? A group of people or a trained expert? In stock markets, I think what certain experts like Warren Buffett might say is that markets provide opportunities for a kind of arbitrage when an individual expert believes that the collective is not correct.
Prediction markets show the pricing of probabilities, but they do not bring certainty.
As mentioned, there are all kinds of studies about the predictive capacity of prediction markets. I’d imagine there will be more studies done over the next few decades as these markets grow in terms of access and popularity. To the best of my knowledge, the studies are not definitive about the “calibration” of prediction markets. In other words, if a market believes that an outcome has a 60% probability, does it really happen 60% of the time? As I’ve learned this week, apparently people feel compelled to utilize prediction markets to their financial benefit as they predict the weather! Needless to say, the weather arrives when and how it arrives. It really doesn’t care what markets predict. This is similar to the world of small business valuation. An analyst can look at comparable transactions and analyze the cash flows and the likely required return for a hypothetical buyer. We can tell you what we think a business might be worth. But whether and when an actual buyer might offer that amount is impossible to know. Sometimes there just isn’t a buyer in the market for what we think a business might be “worth.” Sometimes a buyer exists who is willing to pay much more.
Still, there is a bit of an illusion of certainty.
I won’t name the network or the market, but I will say that I’m not at all comfortable with a certain network and a certain market that appear to have some kind of relationship. The network mentions the market constantly, and in fact, seems to quote the market as a proxy for the actual probability of certain outcomes. That strikes me as an unwise conflation.
The biggest difference is with market participants and intent.
I’m not sure how to say this politely, but with prediction markets, at least some of the capital flow appears to be driven by speculation, gambling, and people looking for a quick hedge. I don’t know what percentage of contracts are held to maturity, but I’d imagine it is low. From my observations, people seem to flip contracts rather than hold them until the outcome is realized. The motivation is short-term. With business valuation, the “hypothetical, financial” buyer inherent to the Fair Market Value standard is not buying a business to flip it later this afternoon or even next week. They are generally looking at sustainable cash flows.
For the record, I am wary of the tokenization and gamification of almost everything in our economy. Yes, I started in crypto early, but I have almost completely divested from that space, other than a small stake that I think of as a cross between experimentation, curiosity, and entertainment. Digital assets are not a topic that is likely to come up between us unless you raise it first. (But if you do, lookout!)
I’m also wary of this notion that every outcome of every election, every sporting match, and every pseudo-celebrity life event and outcome must be monetized. Gambling on sporting events seems to be de facto legal now almost everywhere in the US. For most people, participating in these markets is not likely to be a productive part of a financial plan. It is also worth noting that these particular markets appear to be highly subject to insider trading, and possibly even to manipulated outcomes. But I will say that I have enjoyed digging in just a bit and learning more about how prediction markets function.
Next time you visit the dentist, though, be sure to share with them any thoughts you might have about Kalshi and/or other prediction markets. You should wait until they have loaded you up with metal instruments, of course. If these markets interest you, I’d be happy to hear about it from you, as well!