The Original Prediction Market Was Betting on the Pope

markets episodes. We did one with Nate Silver late last year, but we should talk about them more.

is blonde or whatever. Try don't watch, but you know it like gives you a read on like, Okay, this is interesting right now. And I do really think there's something to be gleaned that's in the price that in several of these And it's not that they're right or wrong. And I've never thought about the usefulness of prediction markets from a right or wrongs standpoint, but more like, you know, if you have an opinion on something, how does it

differ from conventional wisdom right now? Is there a big gap between your sense of something happening in the market sense of something and so sort of taking the temperature of the betting public, and it is a narrow slice. You know, not everyone bets, but you know, generally speaking, there isn't gold lying on the ground, right Like generally speaking, there aren't tons of obvious opportunities to make money from these markets.

actually get better predictions? As you say, there tends to be a certain type of person who is betting on something like polymarket and Calshi, so maybe it's a good thing for getting a read on a particular slice of the population, but I definitely have questions Anyway, all of it kind of got me thinking we've probably had some form of early prediction market, way way back before we had things like poly market and Calshi and I guess

getting philosophical. All markets are essentially prediction markets. People think a company will do well or bad. But there must be some early examples of people betting on very specific social things. And it turns out there is one. There's a really good example, and it is the PayPal prediction market.

such an outrageous thing to bet on. And when I went to the comments, which were a mix of compassionate and tasteless, I saw this idea that you could be excommunicated for gambling on this market, and while that's actually no longer true, that led me down this rabbit hole of trying to understand what were the dynamics around this, why was this put into place, what did it mean?

And I started looking at the academic literature and I saw there wasn't a lot of public facing writing that went any deeper than this market existed, and you could be excommunicated for it. And so I figured, if not me, then who else that's warted writing about it?

l L animal. It's like the animal. And so it's a it's a papal decree that essentially has the rule of law. And papal bulls made up a lot of historical Catholic law until nineteen eighteen, which is when there was a massive reform of the entire canon law, all the law of the Catholic church, and the bowl was not renewed as part of that that reform of the law.

brokers were often people like cloth merchants, spice traders. They're often tied to the Florentine financial industry, and they took bets on everything, not just papal elections. It took bets on the outcome of sports matches. The most popular games in Renaissance Room was essentially kind of translated as boy or girl. They would find a pregnant woman and they would take bets on whether shoes and give birth to a boy or a girl. Wow. And this was an

incredibly popular game. It was so popular that it actually was banned in the late fifteen hundreds. And they took bets on everything from will new cardinals be nominated? Who will the new cardinals be? How long with the pope rain?

form of risk catching. So you had financial institutions banks that would in the same ledger give updates on shipping insurance that an investor had underwritten and the results of their paper bets, and so these same institutions would actually do, would actually offer both. There wasn't a clear distinction between gambling and financial investments in some of these environments. And you sort of think this is an early form of

political risk catching. Because in the fifteen hundreds, the pope ran a major country, the Papal states, it was going to think of it as covering a large part of central Italy, and when a new pope came in, it often meant it was a new family that had political influence. It often meant that projects or taxation policy would change, You might might might go to war, and so there was really a big policy changes that would happen as

popes switched. And it makes sense that some investors might want to hedge against that money real money.

I'm just fascinated by the sheer proliferation because this is the characterization of society right now, whether it's pure betting on sports, something that's a little then crypto, and then you get a little closer to the spectrum of like real trading or something options and then stocks. We have this incredible spectrum of opportunities to bet or trade.

culture of of gambling. The second was that it was a center of politics and intrigue, and so a lot of our information on the odds throughout the conclaves, and the fifteen hundreds comes from ambassadors from Venice, from France, from Genoa. And because there was all this interest among all these other foreign powers, there was a lot of

information that leaked out of the conclave. And so when there's a lot of information and there's a market where you can try to make money off at information, you can sort of see how the incentives aligned to drive a lot of interest in the market, and because sew

the incentives align to try to do market manipulation. So one of the more interesting stories was in fifteen to fifty five, I believe it was Cardinal Carraffa, who was one of the favorites to when about seventy percent odds to when a rumor went out after he missed Mass that morning that he had died, and his odds dropped down to thirty percent. People who clearly didn't fully believe that he had died, but there was enough to see some change in the odds, and it turned out he

was very much alive. He was elected pope, And you have to imagine that there were some unscrupulous brokers and rumor spreaders who made a lot of money off of the shifting odds there.

These are also really politically. There's contentious elections, and there were factions, and so if you know all the players and you know the dynamics with foreign powers, you have some indication of which alliances of factions might come together to elect of pope and who the kind of logical compromise candidates would be. There was an idea, and I'm

going to butcher it at the Italian Papa Belli. I think of this person who was sort of seen as a potential future pope, and so the people who were candidates who were likely to be chosen were already sort of identified in the public sphere. And then the last

dynamic that would drive odds was money flow. So if you set odds and you started getting a ton of bat on those odds you set, that would create pressure to lower those odds and to make to basically protect yourself from offering two good of odds on a candidate who might win. And so there was a direct flow of that, where you know, people would adjust their odds based off of the flow of wages. There is also

sort of a proto secondary market. We have some records of people saying they sold their ticket after the odds changed, so sort of like a prediction market, right, you buy it at ten cents, you sell it at fifty cents. People would sell their tickets that were at one hundred to one odds when they went up to ten to one and lock in their gains. And so that's that also I've made, but I didn't cover exactly how prevalent

that was. But that also could have been a driver of setting prices for these different candidates.

is characteristic of all markets today, including the popular prediction markets. Some of the prediction markets like so and so going to get pregnant, there probably isn't the real money. You probably don't really see much activity there, but you know a lot of things certainly areas like presidential elections or

midterm elections. It's some of both. But the other thing I'm really interested in is, you know, Tracy and I work on financial media, which is subsidized by people who want to sell access to investment products, and these days it's more ETFs, but et cetera. This idea that like betting has always been a subsidy. Betting or investing or gambling has always been a part of what subsidizes the existence of news media.

just it wasn't just the newsletters that spread information. There was also taverns people would spread rumors and share information, and caverns. So there's a statue called the Pekino which has been for hundreds of years, this place where people would leave anonymous notes to spread information. And so those notes often had information on what was happening inside of

the conclave. And the other piece that it was interesting was that the diplomats, the foreign diplomats who were in Rome would report back to their kings, monarchs, whoever, whoever, the leaders on what was happening inside the conclave. And so that definitely created a lot of demand for getting that initial firsthand information which presumably was passed off informally. And one other piece that set odds your question earlier. Another piece that set odds was if a certain person

who was considered in the know would make bets. So you had certain people like if a Venetian ambassador made a major bet, that would be a strong signal that person had some insider information and that they this person was likely to win.

locked room. They swear not to share any information, which I think is better in force today than it was back then, and they vote up to four times a day, and every time they vote, if there's no if no one has a two thirds majority, they burn the ballots this black smoke, oh yeah, yeah, famous, the famous black smoke. And they try again up to three more times that day.

And some of these conclaves were on for months. They were conclaves where they had odds and how long the conclave would go for, and there was a ten percent actually implied odds of never in one of the conclaves that they would never pick up hope, and so they this is also a piece with these rumors could try

to force the hand of these these cardinals. So in fifteen ninety Paliotti was considered one of the cardinal Palioti was considered one of the favorites to become the next pope, and he's about seventy percent chance, and someone put out a rumor that he had actually already been elected, and the rumor spread so rapidly that the city started to put up his coat of arms. He started to set up as if he had won. If they sent guards to protect his house, because typically after pope was elected,

they people would go and raid their house. It's an interesting cultural norm and it turned out he hadn't won, he hadn't gotten two thirds, and so there's an implication that that was done in part to try to pressure the last few cardinals to make that yeah, make that bet and acclaim him. Didn't work, did not work. Instead, we got Pope Gregory the thirteenth, who started the crackdown in earnest on some of the paper gambling that was happening.

of the Catholic Church. I'm not as sure. The Catholic Church certainly felt threatened by it, and so the Catholic Church, starting even before the hammer really came down, had tried to ban these types of bets from happening, and so they had issued bans, they'd sent police freights out, but they were never rigorously enforced because there was enough intermixing between the betters and people in the Vatican that there was there wasn't a lot of impetus for aggressive enforcement.

But when we as you get to the late fifteen eighties and into the early fifteen nineties, you started to see popes do really really aggressive crackdowns, and the level of aggression implies that there was a real threat to the church, and so they would they would raid broker shops and arrest everybody in torture them to find out

who had place bets. They set up a system of thirty if proved brokers that were allowed to take bets on some things, not on the election of cardinals, not on the boy er girl, bets for pregnant women, and if you if you made bets outside of those thirty groups, the punishment was five hundred scooty, which I did a little bit of calculation, I think it's about seventy five hundred dollars, which a year's wage for a rural work was about fifty scooty, so ten times the wage of

an average worker. And you can even be sentenced to serve on the galleys, so being kind of conscripted into the military for being caught on this. But the real crackdown came with Kogetos, which is the Papal Bowl, banning it. And I actually brought a copy with me from the from the Yale Binding Key ra Book Library.

And if I can read it, individuals driven by greed or fear of loss improperly seek to influence, obstruct, or delay these sacred elections and promotions through illicit means, either directly or indirectly, all those emotioniously the fame rous slander candidates,

undermining the dignity and reputation of those involved. Such actions as distract and cool the sincere prayers and devotions of Christians, and then instead many individuals pursue temporal profit or personal gain rather than selecting candidates based solely on merit, employing

numerous fraudulent schemes lie succeed in manipulations. There's also pieces here where they say people are trying to forbidden arts like divination or invoking the demount of assistance, driven by desperation and greed to figure out who who is going to win, and so the bowl is really strict. It says they permanently forbid all forms of wagering, betting, or

speculation regarding papal elections, the promotion of cardinals. It nulls and nullifies any existing bets or elections that have already sorry, any existing bets or wages that have already happened. They declare all future agreements null, void and invalid. Any any funds or valuables involved in those should be given to charitable institutions with no allowances, and anyone who does this is automatically excommunicated from the church.

you're excommunicated. And then one of the piece that's really fascinating is that any clergy or figures who violate the decree are immediately stripped of their office and are incapable of being reassigned. And so think about the intensity of it. You can sort of see, you can sort of infer some of the feelings that church had about the effect this was having on these processes over time.

that is what gambling drives people to do. And lucky numbers blowing on the dice, like all these things that reveal a certain metaphysical reality other than the one prescribed by the church super instant to talk to us about, like, I don't know how we got from there to where we are today through line.

as one country. And the eighteen seventy eight election is one where we have New York Times reports that there's this massive gambling on the new pope in the next election, and so you can start to see that the spiritual authority by itself was not enough to stop this gambling. After several hundred years of success, and as you move through the twentieth century, the next big milestone was nineteen seventy eight, which is with the first time that the

UK bet makers offered odds on the next pope. And what's interesting is that if you talk about prediction markets as a way of seeing the future, they weren't very effective. John Paul the first and second weren't offered odds at all in that year, and so that implies that it actually was not very good at picking candidates who are not expected right. John Paul the Second especially was not

expected to become Pope going into the conclave. And then as we go through the rest of the twentieth century, two thousand and five, I sort of remember this when I was pretty young, but I sort of remember in two thousand and five kind of scandalized press about Patty Power offering odds on the pope, and I looked it up before I came in here. It was about four hundred thousand dollars was bet just through Patty Power on who the next Pope would be in two thousand and five.

That was Pope Benedict, and that actually was fairly accurate. It was three to one odds that Benedict would win. Twenty thirteen, Pope Francis, the current pope, was about a seven million dollar market through patty power alone, and so you can see it's already growing exponentially. And I remember very scandalized press about this. And what's interesting is that the current Pope Francis started off at fifty fifty five to one odds and never did better than thirty two

to one. And so for these closed door decisions where like like Supreme Court decisions, papal conclaves, things where the public information is much more limited than say an election, the prediction markets have a very mixed record of accuracy and talking about the through line of some of these same dynamics, Vatican Insider that the current Pope Francis was starting to get momentum in the conclave and they didn't

really move the market very much. And it's one of those interesting things with closed door decisions where insider information, especially when people aren't familiar with the dynamics around the decision, it's hard for outsiders to get a good sense of is the information actionable or not.

at the time. There was some interest in whether or not they would pick an Italian and because obviously, you know, the prior Poe had been German Retzinger, and prior Pope to that had been Polish, and so this idea is like, oh, and so the fact that it went a long time, I remember some people were saying, oh, maybe this means they haven't settled on an Italian and so you could sort of see, you know, how people try to relate conclave duration with outcome.

There must be more people betting in general than there were like when Patty Power started doing this.

And I do think that there's this dynamic that's going to start happening more and more, where like you said, we've gone into a gambling culture again today, and pretty rapidly. I mean it's ten years ago. I think online gamps poker was had the big landmark case that made it illegal, and we're seeing prediction markets, which used to be capped as academic academic tools set eight hundred and fifty dollars,

are starting to become unrestricted crypto lets. People bet on poly market internationally, even if it's illegal in the US. And I think that we've you know, in nineteen eighteen, part of the reason why it wasn't written into the new Canon law is that it hadn't been a problem. The papabull had done its job in stamping this out as an activity. And I do think there's going to be a big social discussion of do we want this type of market for everything? And where where does it

become an issue of taste, morality or other pieces. And it is interesting because I think it's I think society is largely agreed. We're okay with sports betting, We're okay with even political betting. Where casinos are being legalized in more and more places, is generally and moved towards gambling culture as a as a rule, and I think we haven't quite found the limits of where wept we're willing

to accept it. And I wouldn't be surprised if in the next couple of years, if not this something else starts that conversation of what's what's the limit of where we're willing to let these markets run.

the candidates that come up. You know, obviously the sort of real money economic stakes don't exist in the same way that they used to, so to be pure speculative. In the end, there's nothing that governments can do to crack down on sort of offshore, crypto based prediction markets that are decentralized. The Catholic Church itself can come up with a new ball that statements that its adherents are,

you know, choose to either abide by or not. But you know, it is interesting, just to your point about the limits, Like you know, it's weird because even with sports gambling, we find ourselves in this simultaneous, simultaneous moment where we've accepted there's nothing we can do. It's legalized,

this just exists. At the same time that many people are disgusted and disturbed by the numbers that come out about gambling addiction and ruined lives and so forth, And yet there's this feeling of societ little helplessness that well, this is just what it is. We culturize it, and it's the culture. And so I do find that to be a sort of fascinating thing that many people across ideological realms, across power can say this is terrible and yet at the same time feel like and yet there's

nothing we can do about it legally. It's just a very strange dynamic.

then also questions of access and ease of access. It being in your pockets obviously is significantly different thing than having to fly somewhere to make a bet like that.

In fact, I've seen people take this so far that They argue that insider trading is good for prediction markets, right, because you want more accurate predictions, and so if people have insider info, that's one way of potentially getting there. But do you see any social benefit to these types of platforms. What would be the social benefit of, for instance, betting on whether we'll have a new pope?

you believe a certain outcome is likely. And so I remember in the twenty twenty four election, people would make ideological bets on Trump whether or not they thought he was going to win or not, and same with Kama, and there were arguments that when the odds were mismatched in one way or the other, that there was market manipulation. And these prediction markets become part of the narrative of

what's happening. And so I wouldn't be surprised if in the next conclave you see public figures, politicians and strangers on Twitter start to endorse certain candidates for ideological reasons and then place bats as a way of showing of signaling that they support that particular outcome. And I think that gets into really uncharted territory, or at least uncharted since in the last five hundred years.

great way to get engagement on Twitter. But like, if I don't indicate that I've put any stakes at all behind it, the problem is I like that idea in theory because I like the idea of Okay, put some money where your mouth is before you say this stuff, because all you're doing is collecting the benefits of the engagement without anything. But there's no way to enforce that. There's no way to get someone to okay, fine, I put up a ten dollars bit or whatever something this

phenomenal how to like actually like force the side. So I like that in theory, but in practice I see very little way to sort of enforce the BS tax.

most markets. And so there's sort of a paradoxical thing where the scale will almost always be fairly small on an individual level. Even on an agate level, it's large until they reach a certain tipping point and he starts to start to see big money coming in to based off of trying to trying to make actual outsize returns.

of that. The official polls showed something different versus one on poly market, and then as we got closer and closer to the election, there was this sort of idea that maybe the prediction markets were getting it right, maybe they tapped into a certain demographic of the US which actually turned out to be pretty important in the actual voting process. So young men, lots of young men on

these platforms, and they all turned out and voted. So in that particular instance, it was a really good read on the outcome and it also became part of the store.

So I feel like there's no one we you know, at some point people have to reckon with actually what happened. How good were the prediction markets in twenty twenty four. I would say maybe not as great as they immediately got credit for. Anyway, all that said, I didn't think

this was an excellent episode. It's interesting, Ryan said he got interested in this because the idea of paying lobbyists in prediction market contracts, which I've wondered about this too, Like could you have presidential campaigns in which part of the staff's pay was contracts. So it's like, if you're on the Kamala campaign, you get a certain share of your salary in long coma futures. Therefore you have a greater incentive to win, kind of like stock options, et cetera.

I've never heard of that happening, but you could imagine campaign saying part of your salary is in these contracts to create an outcome incentive for victory.

would be good. I would love that. I don't see it happening, but like, I would love that if there was some way to enforce that. But there's like I would love if there was at tax on it, like the damage.

Dashbot and Kelbrooks at Calebrooks. More odd laws content go to Bloomberg dot com slash odd Lots, where you can find all of our episodes, as well as a daily newsletter that you should subscribe to, and you can chat about all of these topics, including prediction markets in our discord dot gg slash.