No Priors Ep. 88 | With Founder & CEO of Kalshi Tarek Mansour

1. 0:00 – 1:22

   Introduction

   1. SGSarah Guo0:00

      (instrumental music plays) Hi, listeners, and welcome back to No Priors. Today, I'll be talking with Tarek Mansour, co-founder and CEO of Kalshi. Kalshi is a recently CFTC-regulated prediction market exchange that's changing how people forecast future events, like the upcoming US election, the weather, the date of arrival of AGI, and the jobs report. Tarek started Kalshi after studying at MIT and working at Citadel and Palantir. We'll discuss what a prediction market is, if it's a threat to democracy, building a regulated exchange, and how Kalshi fits into the broader financial ecosystem. Welcome, Tarek.

   2. TMTarek Mansour0:40

      Great seeing you, Sarah. Thanks for having me.

   3. SGSarah Guo0:42

      This is going to be a super exciting, um, small number of weeks before the election. Can you please explain to anybody who hasn't been on it yet, what is Kalshi?

   4. TMTarek Mansour0:50

      Kalshi is actually the first legal platform in the US where you can basically bet yes/no on any future questions. The thing that's really cool is like, we've basically created a financial instrument where the thing that you're actually buying, or selling, or trading, or betting on is not a stock, it's not a bond, it's not a commodity like oil. It's something more intangible. It's actually whether an event is going to happen or not. So on Kalshi, you can basically buy shares of whether it's going to rain tomorrow, whether TikTok is going to get banned, whether Eric Adams is going to get fired as New York mayor, or whether Donald Trump is going to win the next election.

   5. SGSarah Guo1:20

      Okay, cool. I feel like

2. 1:22 – 3:35

   Sarah makes a live election bet on Kalshi

   1. SGSarah Guo1:22

      the easiest, uh, way to get a sense is like let's make a trade. I'm going to share my screen. Okay, here I am. You got Kalshi?

   2. TMTarek Mansour1:29

      Yes, this is kalshi.com/elections. This is actually our live election forecast page. Uh, you see- you can see that Trump is up, uh, 55-45 right now, uh, and 19 days left. So we'll see how that evolves. Um, you can go... Yeah, you cl- I think you're clicking. So this is the election market, uh, I- I'm actually going to let you figure it out.

   3. SGSarah Guo1:49

      No, no, no. I- I understand here. Uh, I think, uh, you know, Trump at 55%. That feels underpriced to me. Let's go in on it. $267. Oh, I got, I have $150 in cash so I'm going to go all in on this. It feels, it feels like a trade I want to make. Um, uh, let's see, what happens? Market closes when the outcome occurs. Two hours after closing. I'm ready. Did that just happen? (laughs)

   4. TMTarek Mansour2:24

      Yeah, it's done.

   5. SGSarah Guo2:25

      Oh, wow. Okay. Wow, you're gonna bankrupt me. This is too easy.

   6. TMTarek Mansour2:28

      Yeah, I mean, it's- it's pretty cool, right? So I think, like, the cool thing about this is, like, you can actually also sell it before... So if you click on Donald Trump right now, you can see your position, um-

   7. SGSarah Guo2:38

      Mm-hmm.

   8. TMTarek Mansour2:38

      Uh, or on the... Yeah, right here, and then you can see your position and you can actually exit it if you want to. So you can sell at 55 if you wanted to.

   9. SGSarah Guo2:45

      Yep.

   10. TMTarek Mansour2:45

       You should now. But, uh, so right now, obviously, if you sold it directly, you'd just be paying- paying the spread, paying the bid-ask. But if things move, if he- if his odds go up in a, I don't know, in a few days, or tomorrow, or whatever, you can sell it at a profit. The other thing that's actually really cool, and we launched this just now, is now you have a bet on Trump, you also like only get paid interest on that bet. So it's- it gets deposited in- in money markets, in US treasuries, and you get paid 4.1% interest while sitting there waiting. And- and so it's cool because usually people say like, "Hey, these are kind of zero sum type things," like you either win or lose. Whereas in here, like whether you win or lose, you're getting paid interest, um, while waiting.

   11. SGSarah Guo3:25

       Excellent. Excellent. I will go deposit more of, you know, my, um, total wealth given, uh, given money market accounts now.

3. 3:35 – 5:48

   Getting approved and regulated by CFTC

   1. SGSarah Guo3:35

      You recently, um, were involved with a long-term kerfuffle with the CFTC to get regulated trades on political events. So you've been at this for, I think, six years as a company?

   2. TMTarek Mansour3:47

      Yeah, fi- five and a bit. Yeah.

   3. SGSarah Guo3:49

      Five and a bit, okay.

   4. TMTarek Mansour3:50

      Yeah.

   5. SGSarah Guo3:50

      Um, it's a totally insane thing to try as a startup to, um, you know, go up against the CFTC. Can you talk about that?

   6. TMTarek Mansour3:58

      We hold two core beliefs. I think, one, prediction markets have the potential to be the next large thing in financial markets. I- I do genuinely think that, like, if you think about it, uh, from first principles, like people like to take exposure on things. They like to speculate. They, sometimes they want to hedge. They like... Or, you know, it could be either betting or- or hedging. But- but it feels like the current instruments are a bit like, you know, you- you have things like, okay, you have stocks, that's fine, but you also have like options and futures. They're all just so loaded. It's like so Wall Street-y and like people don't really care. Um, but if you think about it, like prediction markets, what they do is like they- they achieve a similar- similar sort of like urge or they- they... I think they're targeting a similar market, but instead of like these kind of traditional boring financial instruments, you're- you're taking positions on things you care about. Like, I have a view on the weather. I have a view on climate. I have a view on AI, which a lot of people have a view on now. And then you can basically take a stake in that. So I think that, one, they're going to be very big. I think so. And then two, I have yet to see a financial market that has gone really big without being properly regulated. I- I have yet to see that in history. It's- it's always like you have to do it legally, safe, compliant. So- so our- our core approach from the start is like legal, and safe, and compliant, and trusted first. A bit like Coinbase, how Coinbase approached crypto, and I've always liked their approach. And so before we launched anything, we spent actually, you know, close to three years getting regulated up front by the CFTC. So we've written a lot of the regs. We actually spent, you know, literally 14, 16 hours a day for a year and a half doing nothing else other than writing law and regulations for how prediction markets could be regulated in the US, and we got it done with the CFTC, and we got approved. So we were the first actually, uh, market in history that actually could do prediction markets in- legally in the US. So that was one, step one. The thing that we fought over is that after we got approved, the one thing they didn't want us to do is the US election. There's just so much taboo-

   7. SGSarah Guo5:47

      How do you...

   8. TMTarek Mansour5:47

      I don't know how to explain

4. 5:48 – 7:21

   Going up against the CFTC to legalize election betting

   1. TMTarek Mansour5:48

      it. It's like, part of it is in- is Congress. There's a- there's a vocal minority in Congress that just hates them, and I, maybe we talk, we can talk about this in a bit. They- they believe that they're going to break democracy and this is gambling. I obviously totally agree- disagree with that. But it was funny because, um...You know, our board at first was like, "Well, this sounds like a horrible idea." Like, when we, when Juan and I brought it up to Alfred and, and, and, uh, from Sequoia and then YC, we're like, "Hey, we're going to sue the government, our regulator." And they're like, "We... It's never a good idea. It's just a bad pattern." But we took the risk (laughs) and, uh, it was brutal. Uh, it was really brutal. Like, going up against the federal government is, is, is super tough because it's like the plane, the balance of field is so tilted. The standard to win for you is so much higher than the standard to win for the government, but we won, and, uh, and winning felt pretty good. I think the win was worth all the years of pain (laughs) . And I think maybe this is how it is for, I think, any entrepreneurial journey, is like you go through all the pain for so long, you have to endure, and then the ups, the highs are so high that it makes it all worth it. So we won this month, and the cool thing now is like, it's the first time in 100 years that, uh, betting on the election, trading on the election is actually legal in the US. It's finally back to actually being legal, and this time it's actually regulated, and we're the only ones that can run it.

   2. SGSarah Guo7:04

      You just, I think, like, seeded a whole bunch of threads that we, um, should talk about. Like, what is... Uh, maybe we'll start with one that I think is important. Um, what is the argument against, uh, trades on elections? Like, what is the sort of ruining

5. 7:21 – 8:12

   Debating the ethics of trading on elections

   1. SGSarah Guo7:21

      democracy concern?

   2. TMTarek Mansour7:23

      Yeah. It's two arguments. One, uh, you know, there's a question like, is this gambling? And then the second one is, could they ruin the perception of elections?

   3. SGSarah Guo7:30

      Is there reflexivity in this?

   4. TMTarek Mansour7:32

      Exactly, exactly, reflexivity. I think that's the right term. Like, co- could some weird thing go in a loop and... So let me address one by one. So, I think the gambling piece is super interesting. I love, I love history and I really love financial history. Like, wha- when I got into it, this, one of the big reasons, like, I loved sort of how did we come up with all these instruments. I worked at Goldman Sachs. Have you ever been to a Goldman, uh, Goldman Sachs trading floor? Or any, any trading-

   5. SGSarah Guo7:53

      I used to work at Goldman, so yes.

   6. TMTarek Mansour7:54

      Oh, okay, so great.

   7. SGSarah Guo7:55

      Yeah.

   8. TMTarek Mansour7:55

      So, I mean, you see, like, it is so weird. Like, you have like hundreds of traders sitting behind laptops trading things like options and swaps, right? (laughs) And the question that always comes to mind is like, how did we get here? Like, it's insane.

   9. SGSarah Guo8:03

      (laughs)

   10. TMTarek Mansour8:04

       But the thing that's interesting is most financial instruments, really the vast majority, in the early days, they

6. 8:12 – 9:12

   Gambling vs. trading

   1. TMTarek Mansour8:12

      were called gambling. Like, that was the consistent thing against it, is like a form of speculation or gambling and that's bad for, bad for society. An example I love to quote when it comes to the gambling piece is like, so in 1905 when grain, grain futures got legalized in the US, it was a Supreme Court decision. Uh, and grain futures now we think of it as like the most boring, like, financial, like, you know, hedging farmers, like, you know. But at the time, they actually would call it gambling. It was like this new asset that people were like, "Hey, a lot of people are speculating, so it shouldn't be allowed." And then the, the court decided like, no, fine, some speculation is happening, like it does happen in the stock market, but that doesn't mean these markets are not important. And I think it's the same thing here. It's like, it's crazy to me to think that like tr- taking a stake, a position in the election is the same thing as like betting on a di- dice roll, like that doesn't make any sense to me. Uh, elections are real, the people have economic consequences coming out of the elections, um, and people may want to hedge it or people may want to... even the forecast is important now for it, for these markets to exist. Um-

   2. SGSarah Guo9:06

      I think actually it's like worth contextualizing a little bit like why futures exist to begin with.

   3. TMTarek Mansour9:11

      Yeah.

   4. SGSarah Guo9:11

      Right?

7. 9:12 – 12:38

   Context and purpose of futures markets

   1. SGSarah Guo9:12

      Y- you mentioned, like, hedging, but just to, um, sort of complete the, the basic story there, like going all the way back to like Japan, Dojima Rice Exchange, like the original function of futures markets as I understand them was like, uh, for farmers to hedge price changes, right? Y- you know, even before 1905 US, um, US grain futures. And so smoothing out or allowing people who have real economic stake in something to, um, protect themselves was the original premise. What is the difference between like gambling and, and trading?

   2. TMTarek Mansour9:46

      So I guess let's differentiate between two things. There's the stock market and the function, why it exists. And by the way, a lot of people, you know, I mean, there... I don't want to make this political, but I, I have to because my business has been pretty political, but like This is Warren's other word where even now the stock market has a lot of speculation and we should limit it in a variety of er- different ways. That would be, that's a horrible idea. We should not do that. But the reason it exists is capital allocation, right? You're, you're moving capital from people that have it to people that need it, very simply. And that makes it worthwhile to exist, and that's why hedge funds exist, and that's why all these, you know, we have Wall Street.

   3. SGSarah Guo10:14

      Mm-hmm.

   4. TMTarek Mansour10:15

      The futures market, the derivatives market, where... is a bit different. It's not capital allocation, it's risk transfer.

   5. SGSarah Guo10:22

      Mm-hmm.

   6. TMTarek Mansour10:22

      A- and I love that notion. I love that notion so much. It's like, it's, it's even more neat. It's like you're transferring risk from people that like have it but cannot bear it, to people that don't have it but can bear it. They, they want to diversify, they want to buy it, et cetera. And this, this applies to, to the, yeah, to the example of grain futures or rice futures or, or pork belly futures, the, the kind of really old school stuff. Um, and the interesting thing in these markets, like farmers are hedging, like you said. Their, their ability to hedge allows them to have more forecastability, like, "Hey, I'm, I'm planting a batch now. What price am I going to be able to sell it at in the, in the fall?"

   7. SGSarah Guo10:55

      It makes it a higher quality business to have that forecastability too.

   8. TMTarek Mansour10:57

      Much high- Exactly. Without it, you have too much unpredictability, and what happens with unpredictability is you have less of these businesses. It becomes a harder business to run, so you get lower supply of grain. So, you know, we just actually established that no grain futures today would have resulted in higher prices for bread. That sounds like a horrible thing for society actually. It's a good thing that we have them. Now, that is different from gambling, right? Like, grain prices or hurricanes or Brexit happening or not, or election, Trump versus Kamala winning, that's a risk that exists already, right? Like, it's not like you and I are creating this risk so that we can bet on it. This exists already, and some people, like if you run a climate tech company, you're obviously better off if Kamala wins than if Trump wins. Um, if you run a crypto company, you're better off if Trump wins than Kamala. You have a real tangible binary risk that you may want to insure against. Um, that's very different from you and I going and doing a roulette spin so that we can speculate. That, that is an activity that's recreational. That, I don't have strong views on gambling or not. I think people should be able to do whatever they want with their money, but that's different. That does not have benefit for society that go beyond just having fun.... right?

   9. SGSarah Guo12:04

      Mm-hmm.

   10. TMTarek Mansour12:04

       Um, and so, yes, I think hedging is a core pillar, but then there's actually another thing that people don't talk about, it's called price basing in these markets, which is it gives you an indication of price.

   11. SGSarah Guo12:14

       Mm-hmm.

   12. TMTarek Mansour12:15

       Right? Like, farmers without a futures market have no idea what this thing is going to sell for in the fall. The futures market actually gives them an indication of what it's going to sell for. And I think the – the prediction markets take it a step further, it's actually the price is equal to probability, it's even cleaner. It's like, who's going to win? Right now it's saying 55% Trump. If- is TikTok going to get banned? I think... I forgot right now. I think by May, it's like 35%. Doesn't look like it's going to happen.

8. 12:38 – 17:17

   The human psychology behind speculating /Humans conditioned to risk taking

   1. TMTarek Mansour12:38

      All these, like you're pricing the future. A- and, and, and I think that's another really neat concept, because if you price the future, then you can... you're smarter, right? Like, you can make better decision about what's going to happen. Uh, if you're a TikTok creator, now you, you're not going to... You know, whether... The likelihood of TikTok getting banned is a l- life, life or death situation for your business, basically.

   2. SGSarah Guo12:57

      They are related.

   3. TMTarek Mansour12:59

      Yeah.

   4. SGSarah Guo12:59

      Right? Uh, I mean, I have graduated from poker to informed investing.

   5. TMTarek Mansour13:04

      There is speculation in all markets. That's a fact, right?

   6. SGSarah Guo13:08

      Mm-hmm.

   7. TMTarek Mansour13:08

      And, and speculation is like you bring some money to make more money and, you know, it's something you don't really control. Without it, you don't get a liquid market, right? If people don't have that, they're not doing that, you don't... the market is not going to have any activity. It's impossible. And so that's a, been a kind of rule of markets. Like, you have to have speculation. You have to have some of the degens, you have to have some of the informed, you have to have every- a little bit of everything to have a, you know, vibrant marketplace. People love to speculate. So we started different forms of speculation/betting/gambling before we even could write. Most people don't know this. We actually used to play games. Like, we used to do it with rocks, like (laughs) ... And then, you know, people get a reward if the rock comes your side, and you pay something if it doesn't. Uh, uh, and that was before we had actually like a language. It's probably some- something related to evolutionary psychology. It's interesting because when you confine it to the, "Okay, I'm, I'm placing a bet on Trump," or, "I'm placing, you know, I'm, I'm betting on something specific," you know, sure, you kind of... We grasp as like, oh, this is people betting on something. But I, I think, like, if you brought it a bit more to, to life, like, we are constantly making decisions where you're, we're risk adjusting, we're taking risks. Sometimes not taking the risk is another form of risk. Like, like, life is risky. You walk outside, you might get hit by a bus. You're taking a risk by walking outside every single day. I, I believe we have been conditioned to risk taking. Humans are conditioned to risk taking. You know this thing that Nassim Taleb talks about, when you're evaluating risks? Like, your grandma is better than most data scientists. Have, have you ever...

   8. SGSarah Guo14:31

      No, no, no, explain.

   9. TMTarek Mansour14:33

      So, so basically, there's this whole thing in, like, measuring risk, where unless you're talking to, like, a PhD or a research lab that's extremely specialized in a very specific form of risk, asking your grandma is actually a better rule of thumb than actually doing any data analysis. Like, COVID was a pr- typical... Like, you had a bunch of people, you know, like the, the, you know, the midwit meme. Like, they, they did a bunch of analysis, like, "Hey, COVID, and it's... probability of you dying is lower than a bus," and whatever. And if you ask your grandma, your grandma would be... say, like, "Hey, wear a mask," or, "Stay at home." I guess there's two insights. One, generally speaking, don't listen to data sci- data scientists. Data science is mostly bullshit. Health papers and stuff like, most of them are just total garbage.

   10. SGSarah Guo15:11

       What makes them garbage?

   11. TMTarek Mansour15:12

       It's just so easy to print the data, and it's so hard to actually make sure, like, check how the data and they... like, it's just-

   12. SGSarah Guo15:17

       Ah, reproducibility and just-

   13. TMTarek Mansour15:19

       Reproducibility, or qu- sampling is... And even if it's reproducible-

   14. SGSarah Guo15:23

       Okay.

   15. TMTarek Mansour15:23

       ... there's so many things that could go wrong, and the incentives are off, and you have to publish in Nature, so you have to do all sorts of weird things. It's true that grandmas are surprisingly good at, at, at risk management.

   16. SGSarah Guo15:33

       (laughs)

   17. TMTarek Mansour15:33

       They have a very good intuitive understanding of risk. Humans, we've evolved to be pretty, fairly ser- fairly good with risk, actually. And, and even current society actually rewards risk takers better than non-risk takers, right? Like, you see it everywhere. Is it actually that much more risky to place a bet on something you're interested in, or even something that's totally garbage, like, you know, in a casino, than starting a company? Like, I, I think about these things a lot. Like, I would argue starting a company is even crazier. So how do casinos actually advertise their products? They, they, like, show you the one person that made $300,000 on the slot machine. People get excited and everyone goes and does it, and, you know, everybody knows the odds, et cetera. YC kind of does the same thing, if you think about it. Like, you know, we, we... They show, like, Airbnb and Coinbase (laughs) and then you have, like, a flock of people basically going in to start a company. Um, now, the big difference is obviously starting a company is actually net positive for society, versus, like, playing on a slot machine is not. But I'm, I'm talking more about the notion of risk. Like, we all love taking risks.

   18. SGSarah Guo16:32

       Mm-hmm.

   19. TMTarek Mansour16:32

       It's just more fun. Living a life where you're taking risks is just such a superior life than one where you're just not taking any, right? Um, so yeah, take more risks. I'm taking a lot.

   20. SGSarah Guo16:42

       Yeah. I believe generally the principle, I think it depends on what the profile of risk is, and I think Nassim Taleb is a, is, uh, you know, fundamentally pretty conservative, or-

   21. TMTarek Mansour16:51

       Yeah.

   22. SGSarah Guo16:51

       ... you know, technophobic in some ways. And I'd be like, "Hey, man, like, I am investing in AI. My grandma cannot take these risks," right? (laughs) So, so I, I, I think it depends.

   23. TMTarek Mansour17:03

       I mean, he's more on the short side. He, he's like more the pessimistic negative side.

   24. SGSarah Guo17:07

       Uh, Kashi is just a, a fascinating business. You used to work at Citadel.

   25. TMTarek Mansour17:11

       Yeah.

   26. SGSarah Guo17:11

       You are starting this market from scratch. I think the day we are talking, you know, like there's

9. 17:17 – 19:30

   Building a healthy exchange and scaling liquidity

   1. SGSarah Guo17:17

      16 million in on the election plus $950.

   2. TMTarek Mansour17:21

      Yeah.

   3. SGSarah Guo17:21

      Talk a little bit about how you think about designing a, a healthy market.

   4. TMTarek Mansour17:26

      Yeah, I mean, we just launched the election. It's, we're, we're obviously launching, uh, pretty late, uh, because we just won the lawsuit. Yeah, the markets just take time. They need catering, they need watering, but they grow, and they, they're growing... I mean, actually we're growing, like, I think the last two days have been like 6X day over day in terms of, like, signups and in terms of, uh, uh, uh, volume. So it just takes time, but it's, I think it's ramping up very fast. Exchanges are notoriously very difficult businesses to build. They're some of the hardest, uh, because you have the marketplace angle, uh, which is always hard, and exchanges, like you have to bring in the liquidity and that's really hard to ramp up and takes a long time.

   5. SGSarah Guo17:58

      How do you think about retail versus, like, large market makers and institutional investors?

   6. TMTarek Mansour18:03

      I think of it as more of falling on a spectrum that goes from like lots of trade, small size, to less frequent trading, but big size.So I think the way that the market evolves is like y- because we have lower liquidity now, we target retail, and then we scale our liquidity as we scale with retail, and then we scale the type of customer over time. You build a initial layer of liquidity, and we already, I think, have that at Cal sheet where, like, now we have this community, this very dedicated community of people that forecast these events. They price them, and then as they price these different events, you know, like, will it rain tomorrow? Is climate change getting worse or better? Is COVID gonna come back? As you price them, the liq- like, the mere fact of getting a price, you can ramp up liquidity. You can get more and more liquidity over time, and as you get more liquidity, you attract the large institutions that may ... If you're a big institution, you wanna hedge against cyber risk or a, a, a new bill that may pass in Congress that you hate or other. So it's, I think, a progression. That's how we think about it. Elections specifically, we're seeing a lot of institutional flow. They just said, like, we're s- we're a bit late in the game, but the institutions are- take time. Compliance take time to onboard, but we're seeing a lot of institutional flow. There is demand for like 10 million dollar, 20 million dollar ... a- actually, there is demand even up to 100 million dollar trades. We have three weeks, so we're gonna have to figure out if we have enough time with their compliance departments to onboard to Cal sheet. Uh, but if we do, I think we'll see 100 million dollar trades. It's gonna be really cool.

   7. SGSarah Guo19:19

      How do you think about leverage?

   8. TMTarek Mansour19:21

      So, so there, there's a few things. Like, this is a, a, a like a risk-on product, right? This is not like a, if you buy, you know, S&P,

10. 19:30 – 22:29

    Introducing leverage and working with clearinghouses

    1. TMTarek Mansour19:30

       it doesn't move like maybe like 0.5% on typical day, right? It moves more like 10% on a, on a typical day, so it's already pretty volatile. Um, we have been thinking about how could we basically introduce margin and leverage, uh, into the system? Because lev- when you introduce leverage, there's more trading. Right? Like, one dollar can create much more trading activity, um, and we want to introduce more leverage over time. But, um, the system gets riskier. A little bit of context. So we own now, uh, as of this year actually, one of the ... Like, there's a handful of clearing houses in the US that can actually clear, that can move and hold dollars for trading, for trading derivatives. Like, tho- this happened after 2010. So when the crisis happened, Dodd-Frank came in and says, "Every s- like, trading of derivative has to go through central, central, central clearing houses." And the reason for that is like, you and I cannot trade with each other anymore like banks used to do. We can be counterparties because if I ... And what happened at the time is that I defaulted, then you defaulted, then, uh, Alfred defaulted, then, uh, Kelly default- everybody started defaulting. All the banks defaulted, and it was bad for the entire economy. Now it's all centralized in one place where the US government can see the risk, and then that one place can basically, like, manage that risk appropriately. That's clearing houses. So we actually, as of this year, we own one of the handful. The question is like, when do we, when and how do we introduce the ability for people to take positions without putting all the cash up front? But now you're introducing credit risk, right, into the system. I wanna do it. I wanna do it over the next, next, uh, maybe 12 to 18 month. Um, but, um, we're gonna have to get really smart on sort of like, m- like, okay, if Sarah shows up to the exchange, like how much leverage should we give you? Should we let you do 10 to one? Should we let, let you do 100 to one? Should we let you do only two to one? Th- that becomes ... Like, that's a tough question to answer actually.

    2. SGSarah Guo21:19

       Yeah. I mean, it, it f- it feels like there's a lot of decisions to make there, right?

    3. TMTarek Mansour21:23

       Yeah. Yeah, yeah.

    4. SGSarah Guo21:24

       Guaranteeing trades, enforcing margin requirements. Exchanges and, and clearing houses are very complex. And so if you think about, um ... What's a good ex- like maybe the 2008 futures bubble?

    5. TMTarek Mansour21:35

       Yeah.

    6. SGSarah Guo21:35

       Like, there are versions of this that are less healthy and also, like, speculation is gonna exist in any market and, y- you know, people want liquidity, right? So I, I, I think it's a really interesting problem to go solve.

    7. TMTarek Mansour21:47

       If you add leverage, I mean, if you let, if you let people just do it without pre-funding, you definitely expose the system to risk. Again, like risk is fine, we just need to ha- figure out how to manage it. And I think for us, like, this is one of those things, like, where the government is actually very, very tough on, on us and clearing houses to do. Like, we really need to be kind of really buttoned up to get, to get this bas- to be- to get this done, and I think we'll do it. I think we'll just have a lot of work to do to get there, uh, because things can go really wrong when they do go wrong, right? Um, yeah. I mean, 2008 was pretty bad.

    8. SGSarah Guo22:17

       Uh, maybe, like, just thinking about, you know, the, the coming election, uh, how should people think about prediction markets versus polling?

    9. TMTarek Mansour22:25

       There's a lot of confusion around this. Polling is asking

11. 22:29 – 24:59

    Polls vs. prediction markets

    1. TMTarek Mansour22:29

       people who they're going to vote for, right? Like, so, so assume you can go to, to ... you can survey every single person in Pennsylvania and then ask them, you know, um, "Who are you gonna vote for?" And then you count it all up, and then you get that Trump is 51% of people and Kamala is 49% of people. Then you ... It's guaranteed that Trump is gonna win Pennsylvania, right? Like, that's a guarantee. Now, obviously polls s- don't work like that. Polls are biased. A lot of them are biased. You should not trust most of them. There's a few that you can trust, but a- assuming the unbiased ones, like, they don't survey everyone in Pennsylvania, but you s- they survey a good sample, hopefully well done, and then they tell you, "We think that it's gonna be fif- 51/49." The 51/49, that one percent difference of polling that Trump has over Kamala, um, that's definitive, right? That's Trump winning. That's like, you know, if, if the poll is reasonably accurate that, that, you know... Prediction markets are now doing the same thing, right? Prediction markets are just pricing the odds of Trump versus Kamala winning, right? They are four- like they're just giving a probability. We think there's a, you know, today right now it's 55% chance that Trump is winning. That does not mean that Trump is up five percent on average over Kamala on the polls nationally. Th- th- that's not what it means. The other thing that people need to understand is that if Trump polls one percent higher than Kamala or vice versa, prediction markets are more volatile. They're gonna move more than one percent, right? They're gonna give Trump a higher probability or, or K- Kamala a higher probability based on the polling. So it ... People are misinterpreting the data and, and, and like think ... O- o- people say like, oh, like Trump has a 10 point lead or like eight point lead, uh, over Kamala.That's incorrect. That's not what the market is saying. The, Trump does not like, Trump now is more likely, like it's a coin flip, but it's a biased coin flip that's biased towards Trump, to win. You're still flipping a coin flip. It's slightly more likely to go heads than tails, but it could still come tails, and people are, I think, really confusing that. Um, and, uh, you see it right now, right? In the, over the last week, you know, the, the sentiment, people are misinterpreting what these prediction markets are saying. I think people maybe don't understand odds that well. There's some education we need to do.

    2. SGSarah Guo24:42

       Yeah. Well, because there is pricing, not just prediction, right?

    3. TMTarek Mansour24:46

       Correct.

    4. SGSarah Guo24:47

       Yeah. I, I think you can, you can kind of assemble this from different events on Kalshi now, but, um, I, I want to make a, this is just a random feature request for you, I want to make a million dollar event trade that is

12. 24:59 – 26:38

    Conditional markets

    1. SGSarah Guo24:59

       if there is disruption in the Middle East before the election, more money on Trump at up to these odds. I want a conditional event trade. By the way, that's not a political opinion. That's just a-

    2. TMTarek Mansour25:10

       That is a fact.

    3. SGSarah Guo25:10

       It's a trade.

    4. TMTarek Mansour25:11

       Yeah, yeah. But I, I think conditional markets are actually the next one of, so internally also, most of our engineers really want conditional markets ASAP, uh, we want to do them. I don't know when, uh, uh, but definitely in the next few months we want, we're going to do conditionals because I lo- like, I really love conditionals, like I love this idea of like, you basically what you're saying is like, it like, it, and it's a question people ask like, is the Middle East war a, a good thing for Trump or a good thing for Kamala? I mean, you know, let, and, and who does it favor? And then there you can extend that to a lot of other interesting questions, right? Like if Trump wins, what will happen to GDP? What will happen to inflation? If Kamala wins, what will happen to GDP? What will happen to inflation? And you can extend that to everything, right? If, if candidate X wins, what will happen to crime rates? What will happen to S&P? What will happen to trade types? Like, conditionals actually are so neat because it's all about incentives, right? Like, you know, um, it, markets don't lie. That's the beauty of markets, right? Like, ma, markets don't tell anyone what they want to hear. They don't tell anyone what they don't want to hear. Like, markets just do their thing. A- and, and the reason they don't lie is there's money on the line. You can trust one thing in this world is people like making money, and they do not like losing money. You can trust that. As long as you trust that, markets do a fair job at doing this, right? Like-

    5. SGSarah Guo26:21

       Can I ask a question then in the like, like very specific context of this one market? Is there a level at which you'd say that Kalshi is better at predicting the outcome of this election than all polling, uh, from a liquidity perspective?

13. 26:38 – 31:29

    What makes Kalshi’s markets accurate

    1. SGSarah Guo26:38

       Or are you just like, we're there, like we're, you know, it's de minimis scale?

    2. TMTarek Mansour26:42

       Oh, no, we're definitely there. We're definitely there.

    3. SGSarah Guo26:45

       Okay.

    4. TMTarek Mansour26:45

       You should definitely listen to prediction markets. I think Kalshi is unique even compared to other prediction markets is that it's Americans and it's regulated. So, so you know that there's no-

    5. SGSarah Guo26:55

       Mm-hmm.

    6. TMTarek Mansour26:55

       ... like there's no weird thing going on. There's no foreign influence. There's no tampering.

    7. SGSarah Guo26:59

       Yeah.

    8. TMTarek Mansour26:59

       There's no wash trading. Like, it's all here. It's Americans. There's regulatory oversight on top of it, like government is overseeing everything. So Kalshi has this unique thing and there's institutional adoption. So it's not like, there's no... 'cause people ask me like, "Do you have a crypto bias or do you have a Trump bias?" The answer is no. Like we, we have large market makers like Susquehanna, SIG, you, you, uh, and a few others that are confidential. Um, and so I, I think actually Kal- Kalshi has a pretty accurate gauge. Right now, 55% is what I would call fair value. That's the correct odds of Trump winning. That doesn't mean Trump will win, but, you know, Trump is more likely than not to win right now. So I'll give you a few examples. Like we have been the most accurate forecast for inflation over the last two years, which is really hard to forecast. Like we're better than Bloomberg, we're better than The Economist survey. Wall Street is starting to use us instead of any other alternative. We predict the Fed decisions better than anything else. We predicted TikTok, we predicted Boeing CEO, uh, and what was going to happen to him. We predicted the Omicron wave, um, uh, more accurate than any alternative. Uh, and then you have a long tail, like we predict the weather these days, like we can predict daily weather more accurately, more accurately than most weather stations. Um, and it wor- it just really-

    9. SGSarah Guo28:06

       Is there any intuition for that? Like, the, like the rest of it I'm like, oh, you can have more, like, the market has the data, right? Like the weather one, I'm like, man, I've looked at weather modeling and for, like it's a very hard problem. Like-

    10. TMTarek Mansour28:21

        It is.

    11. SGSarah Guo28:21

        ... how could that be true?

    12. TMTarek Mansour28:22

        Here's why. So weather-

    13. SGSarah Guo28:24

        (laughs)

    14. TMTarek Mansour28:24

        ... and by the, the other one is earthquakes, actually. We also predicted, we did a good job, like there was the, the tsunami or the earthquake in Japan, and we kind of did, did a good job predicting like when and how a next one will hit. Earthquakes are obviously insanely hard to predict. You don't, you cannot do it. But I, and what I say, like the statement I made was not like we are always accurate or super accurate. What I made it, what the statement I made is that we're more accurate than alternatives. Um, and the reason is actually very simple. It's like... Okay, let's talk about earthquakes or weather. Earthquakes you, right now the alternative is like you go to an expert and the expert makes a prediction. That's it. And if the expert is wrong, there's no impact, like n- no consequence. And if, and if he's right, you know, people, he'll gain more followers on Twitter and people are going to want to listen to him. Great. When you open a market, this expert that may have an opinion, but there's also a bunch of other experts, maybe also a bunch of random, I don't know, people that read the news and are interested in earthquakes. If you bring them all into a marketplace and you incentivize them to actually be right, what they're going to do is scout, you know, scout for information on the inter- anyone that can find information and then trade it into the market, bring it into the market. That's what markets do so well, right? Like they, they do what we call information aggregation or dissemination.

    15. SGSarah Guo29:36

        Mm-hmm.

    16. TMTarek Mansour29:36

        So you go and do research and then bring it into the market. And then if a lo- enough people do it, you get ma- market efficiency. You, you get an efficient pricing. And if it's not that someone who's smarter that has information that disagrees with the market should also, is incentivized to come and trade against it to bring it back to efficiency. So that's the intuition, right? It's think of it as like wisdom of the crowd plus skin in the game. You combine those two, you actually end up having... It's, it's like a better mechanism to forecast anything than like trusting anybody saying stuff on TV essentially. Uh, and that's why it works for the weather because people are incentivized to be right. They want to make money.

    17. SGSarah Guo30:09

        What is the process to add a new market to Kalshi?

    18. TMTarek Mansour30:12

        Uh, it takes 24 hours now. So that was actually really difficult one because our first market that we ever listed took us 18 months.

    19. SGSarah Guo30:19

        Mm-hmm.

    20. TMTarek Mansour30:19

        Uh, and that's why it takes other exchanges, like when you're— like when CME wants to trade a new, uh, grain future or S&P future-

    21. SGSarah Guo30:26

        Yeah.

    22. TMTarek Mansour30:26

        ... it takes two years. We had to shrink down the tech, the regulation, the ops for that, and now we, like, we literally just compound it over time and now we can do it in 24 hours. So a lot of our team comes up with markets, like what's trending, what's viral, what are people talking about? But 50% of our markets actually come from our users. We have this thing called Market Builder on the site, in the app, where people can just build a market and make the case like, "Hey, I think this should be up." And then we list it within 24 hours. It's weird because if you know whether the movie is going to be good or not beforehand, now you have a forecast of whether a movie is going to be good or not before it gets released. If it's bad, now the movie producers are not going to be able to juice (laughs) the, the week of box office before the reviews go out, essentially. So really, now you're applying market efficiency up front so that you stop wasting people's time and money if they think the movie is going to be b- bad.

    23. SGSarah Guo31:11

        Yeah. That's, uh, that's a fun one. Um, so I assume working at Kalshi, you cannot make trades on Kalshi.

    24. TMTarek Mansour31:17

        I can't.

    25. SGSarah Guo31:17

        Yeah. Are you allowed to, uh, describe the trades you are interested in or would make?

    26. TMTarek Mansour31:23

        Yeah, I can. I mean, I, so, well, actually I cannot trade on Kalshi. I can't trade on any instrument other than stocks because I run a regulated

14. 31:29 – 35:36

    Tarek’s insights on the most interesting trades and markets on the platform

    1. TMTarek Mansour31:29

       exchange.

    2. SGSarah Guo31:29

       Okay. (laughs)

    3. TMTarek Mansour31:30

       The way... Yeah, which kind of sucks, but... Oh my God, I, there's so many that I like. Um, I would definitely... So I would definitely participate in anything that's around, uh, like, a year-long economy, like what the Fed interest rate's going to be and inflation. I love, um, uh, all, all things around tech, so I love actually, like, forecasting whether CEOs are going to be around for the next year or not, and we have it for all major tech companies.

    4. SGSarah Guo31:57

       What tech CEO do you think is going to be out by the, um, end of next year?

    5. TMTarek Mansour32:01

       So I don't think that way actually. I, I think, so right now-

    6. SGSarah Guo32:03

       Okay.

    7. TMTarek Mansour32:03

       ... for example, I don't think, like, yes or no necessarily. I think what's underpriced. I think Elon leaving Tesla is pretty underpriced, or like stepping down and having someone run it. Uh, like it, it says, you know, I mean, now th- this year is close to done but 2% chance, like one in 50? I, I, I don't know.

    8. SGSarah Guo32:23

       You think it's higher than that?

    9. TMTarek Mansour32:24

       Yeah, like if Trump wins and assigns him to be secretary of, of-

    10. SGSarah Guo32:27

        (laughs)

    11. TMTarek Mansour32:28

        ... you know, cleaning up the government, like I, I mean, this is not financial advice, like I, you know, this is not, but this is me personally-

    12. SGSarah Guo32:33

        Yeah.

    13. TMTarek Mansour32:33

        2%, one in 50, like sounds too low. Like that, that, like... And, and that's a 50X multiplier, like yeah, I think the odds are more closer to, personally I think like closer to 15%, 15, 20. So that's one. I think people, like, these are really hard to price so people, like, misprice those quite a bit. Um, and then I would also, like, probably do, um, uh, I would do weather. I, I, I've, I never thought... I've never understood the appeal but now I understand it a bit better. It's so cool because you can do it every day so it's repeated game and you can better, get better every day. Uh, and I, I love that. That's cool.

    14. SGSarah Guo33:04

        Where does the information come from weather? Where would you begin?

    15. TMTarek Mansour33:08

        I've heard from some of our users. I, I know there's a team that scrapes satellite data. They actually figured out how to get, uh, satellite data and like, you know... But it's not just about, like, what the weather is going to be. It's, like, a bunch of atmospheric things and then they correlate it with what the weather is going to be. Um, so I think that's one. There are interesting things around, like, the, you can basically create a bunch of time series, like, like basically cyclical climate patterns. Li- like, you can model... Like, it's all about modeling, okay, what, what, how, how the climate cycle looks like and seasons and, like, there's different frequencies for seasons and day, day, d- daily fluctuation and then also, like, like yearly and decade-long fluctuations and then also, like, there's a millennium. So you can do a lot of stuff like that. Uh, but then after that you just have to tweak and search and research and find niche places where people like to make predictions and, uh, th- there's a lot to do there.

    16. SGSarah Guo34:00

        Do trading firms recruit off of Kalshi leaderboards yet?

    17. TMTarek Mansour34:03

        Yeah, yeah, they do, they do.

    18. SGSarah Guo34:03

        Okay, yeah.

    19. TMTarek Mansour34:04

        They do. Uh, they asked us a lot also, but, but I mean, there are people that consistently... Like, there are people that are making hundreds of thousands of, of dollars a month on, on weather, weather alone. Um, the dude who's, who's forecasted inflation the best... So we have hedge funds, we have pop shops, we have Wall Street people, we... everybody. There's... The, the best forecaster over the last 18 to 2-, uh, 24 month is, is a random dude from Kansas. Never traded in his life, just likes to read the news, and this man just knows what inflation is going to be. Like (laughs) it's insane.

    20. SGSarah Guo34:32

        (laughs) That's awesome.

    21. TMTarek Mansour34:33

        It's ins- It's incredible, yeah.

    22. SGSarah Guo34:34

        (laughs)

    23. TMTarek Mansour34:35

        Uh, but they do cool stuff, like they... Not him, but there's a team that correlated, for example, like how late the lights are on at the BLS with, uh-

    24. SGSarah Guo34:45

        That's so funny.

    25. TMTarek Mansour34:45

        ... the jobs data. Uh-

    26. SGSarah Guo34:47

        Yeah.

    27. TMTarek Mansour34:48

        I mean, (laughs) how do you even come up with that? I don't know, but people come up with st- stuff like that.

    28. SGSarah Guo34:52

        Well, this is so cool. I love the idea of opening the aperture of the types of risks that people can go price in the world and then transfer, and so it's good to hang out. I'm such a nerd about markets and it's a really cool thing you guys have done.

    29. TMTarek Mansour35:05

        This is really fun. I love doing the pod. Thanks so much for having me. This was really, really fun.

    30. SGSarah Guo35:09

        Congratulations on, uh, the, the progress so far and good luck to all our Kalshi traders on the election. (instrumental music) Find us on Twitter @nopriorspod. Subscribe to our YouTube channel if you want to see our faces. Follow the show on Apple Podcasts, Spotify, or wherever you listen. That way you get a new episode every week. And sign up for emails or find transcripts for every episode at no-priors.com.

Episode duration: 35:36