Are prediction markets a new asset class like stocks?

Analysts suggest prediction markets are closer to gambling and wagering due to their speculative nature, not a traditional asset class.

What are the credit risks associated with prediction markets?

Consumers may overextend financially, leading to impacts on credit scores, bankruptcies, and delinquencies, posing a new risk for lenders.

How do prediction markets affect lenders and underwriting?

Lenders' underwriting models, built on historical data, may struggle to accurately price the new risk vector introduced by widespread prediction market access.

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Prediction Markets: Gambling or New Asset Class?

2 Dec

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Summary

Prediction markets are experiencing a significant surge, drawing large investments.
Analysts worry about credit risk and consumers overextending financially.
New risk vectors may lead to mispricing in lender underwriting models.

Prediction Markets: Gambling or New Asset Class?

Prediction markets are experiencing a significant surge, attracting substantial investments and new players. This growth has prompted discussions about whether these platforms represent a new asset class or are simply a form of gambling.

From a consumer finance perspective, there are concerns that these markets could lead individuals to overextend themselves financially. Academic research suggests a correlation between the increased availability of sports betting, often facilitated by mobile apps, and negative impacts on consumer credit scores, bankruptcies, and delinquencies.

Lenders are now facing a new risk vector. Underwriting models, historically based on past data, may not adequately account for the ease with which consumers can now engage in betting. This could result in a mispricing of risk, as credit decisions might not fully capture the potential for financial loss introduced by these platforms.