The Chaos Of Khamenei Prediction Markets

US and Israeli strikes on Iran meant a lot of attention -- mostly negative -- for Polymarket and Kalshi

As the world became aware that the US and Israel had conducted strikes against Iran, many were discovering for the first time that traders were wagering on outcomes related to those strikes.

Most notably, that included markets about whether Supreme Leader Ali Khamenei would be out of power by various dates. (He was killed in those strikes, many outlets confirmed on Saturday.)

As you can imagine, betting/trading on this went over like a lead balloon for people outside of the prediction markets bubble — at least on Twitter. Reactions ranged from disgust to outrage that a platform would facilitate betting on a world leader’s ouster — or death — in any capacity.

The two biggest prediction markets — Kalshi and Polymarket — approached the whole thing in very different ways:

• Polymarket’s market resolved to “yes” that he was out of power because of his death. Markets related to death are technically not supposed to be allowed at regulated prediction markets in the US. Notably, Polymarket’s Iran markets were at its international site, which are not regulated by the Commodity Futures Trading Commission, or anyone for that matter.

  • (I am going to set the morality of death markets and Polymarket aside for a bit, but we’ll come back to that. Love it or hate it, at least Polymarket’s resolution was pretty clear to everyone. Also, before someone yells at me, I am not condoning markets that are based on people’s deaths!)
    

• Somehow, this was a bigger mess at Kalshi, where a similar market was in reality not a market about Khamenei’s death. The amount of words I am going to have to dedicate to explaining this to you, the reader, feels absurd as I get ready to type it out. But let’s give it a go.

  • Kalshi’s market was titled “Ali Khamenei out as Supreme Leader?”Importantly, the rules for the market do make it clear what happens if he dies:

    • “If Ali Khamenei leaves solely because they have died, the associated market will resolve and the Exchange will determine the payouts to the holders of long and short positions based upon the last traded price (prior to the death). If a last traded price is not available or is not logically consistent, or if the Exchange determines at its sole discretion that the last traded prices prior to death do not represent a fair settlement value, the Outcome Review Committee will be responsible for making a binding determination of fair allocation.”

    • And, as I wrote above, a market on someone’s death is not supposed to be allowed under CFTC rules.

  • So far so good, right? It’s not a market about death; if he dies, it resolves to the price before he died. Sure, on paper it’s not a death market. However it’s resolving… because he died. But we’re getting ahead of ourselves a bit. We’ll revisit that when we get to how Kalshi resolved it.

  • The problem here lies a lot in how the market is framed, and how it was promoted. The market title just said “Ali Khamenei out as Supreme Leader?” I and many of you follow prediction markets closely, and we know the fine print matters. Your average retail trader/bettor? They don’t. They see a market that looks like it’s about his death, put money on “yes” and think they have a winning bet/trade.

    • If it was a market about his ouster only, shouldn’t that be in the headline, rather than just in the rules? Something like “Ali Khamenei Out as Supreme Leader Via Means Other Than Death?” That’s not that hard, is it? It’s much clearer it’s not about death! (I’d do this work for you for free, Kalshi.) If Kalshi had just done this, we wouldn’t be talking about any of this. Instead, there’s a lot more to cover!

  • The strikes took place a little after 1 am Eastern. And (unconfirmed) reports that Khamenei was dead were circulating all morning. Still, Kalshi was promoting the Khamenei market as the featured market on its site and on the app throughout the day. That’s despite the fact that the market isn’t about his death, and Kalshi theoretically knew how this would be resolved if he was dead. Should it be encouraging trading on the market with that set of circumstances? Pretty clearly not. To wit:

    

    • For what it’s worth, I tracked a little more than $30 million on this market before Saturday, and around $20 million on Saturday.

  • Twice on Saturday, Kalshi had to make a clarification to the rules for the market. Here’s the one that still lives on the market.

    

  • At some point in the afternoon, Kalshi paused the market.

  • Later in the evening, Kalshi CEO Tarek Mansour told us what was happening with the market on Twitter (emphasis added by me):

On Khamenei:

We don’t list markets directly tied to death. When there are markets where potential outcomes involve death, we design the rules to prevent people from profiting from death. That is what we did here.

I know some of you disagree and prefer that we list these markets without a death carveout because it keeps the rules simple and because many traditional markets, like oil futures, can be proxy markets for war and death. But we believe that’s different than having a market directly settling on someone’s death, which is not allowed for US regulated entities.

What’s the point of the market, then?

A market on Ali Khamenei out as Supreme Leader was important because leadership changes in Iran have major impact on the world order:

• geopolitical implications
• economic consequences
• national security considerations
• oil and commodity prices, many of which move based on news and expectations around this outcome

And it’s always possible for a ruler to step down or transition power without death, even in autocracies. It just happened in Venezuela.

In these instances, we make the caveat clear in the rules and in the market page, but today is a good learning that we can do more in terms of improving the UX and adding more ways to surface the rules. We are committed to improving. In the meantime, here’s what we’re going to do:

• We are reimbursing all fees from this market
• If you have a position from before Khamenei died, you will be paid out on the last-traded price before his death. (This was clear in our rules)
• If you have a position from after he died, we’re going to fully reimburse your cost of entry

Not a single user will lose a dollar on this market. We are settling the market to last traded price before time of death, which is time of the first strike at 1:14am EST. If you bought a position today for a higher price, we'll reimburse you the difference so you'll be made whole. In addition, we are reimbursing all fees paid in the total market for all users.

Finally, here’s how the market resolved, based on last traded price:

Whew, we’re all caught up!

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Some thoughts about all of this on the Kalshi side. (I promise I’m getting to Polymarket, too):

• Reimbursing fees and the money people traded into the market on Saturday is a pretty decent way of making the best out of a bad situation. People are still not happy for a variety of reasons, but for the mess Kalshi found itself in, there were far worse resolutions.

• If a market needs all of this explaining from the CEO, clarifications added to the market, etc., maybe it was a really shittily constructed market. If Kalshi wanted this to be clearly not a death market to the average user, that could have been easily accomplished.

  • For as loudly as Kalshi wanted to proclaim that “THIS IS NOT A MARKET ABOUT HIS DEATH,” how did it resolve? It closed as the time of his death. That this isn’t a “death market” is either semantics or not semantics, depending on how you want to look at it. The idea behind not allowing markets on death is in part because of potential perverse incentives of market participants. Can those incentives still exist based on how the market resolved? I mean, yeah, they do. Any event contract tied to what a person does could create such perverse incentives, in theory. I don’t know what the answer is, but being able to “void” markets when people die would be an answer. That’s probably impractical to do in an exchange setting. But this probably won’t be the last mess like this tied to someone’s death.

• The series of events on Saturday was a pretty reasonable scenario that could lead to Khamenei’s ouster/death. So why was Kalshi making it up as it went? That’s not clear. Running a prediction market is hard, and me sitting here Monday morning quarterbacking it is easy from the comfort of my laptop. But the events of Saturday shouldn’t have been a surprise to a prediction market that might have to deal with a feasible scenario.

Enough of Kalshi, and back to Polymarket, which is also taking heat for having a market tied to death, but none of the drama on resolution.

I am still not a fan. And there was more than half a billion dollars tied to Iran war markets.

More thoughts:

• Even if you are a prediction markets evangelist, hopefully you understand that normies will hate people betting/trading on war and adjacent markets.

  • The argument I was encountering from said evangelists was that people have been gambling on things related to war (oil, etc.) for all of time. And they’re not wrong. But apparently they can’t see that betting DIRECTLY ON WAR OR DEATH ITSELF is a vastly different proposition, at least from an optics standpoint.

  • I definitely don’t think we should be betting on death or war. The vast majority of Americans probably agree with that sentiment. However, I think everyone should read this and challenge your priors a bit:

    • “Today feels like the right day to talk about war markets. Because I think they’re simultaneously one of the most important and most uncomfortable things prediction markets have produced. And the conversation around them has been so polarized that most people are landing on either ‘this is pure evil’ or ‘markets should be free to price anything’ without sitting with the nuance in between.”

      

  • What’s a story like this without some possible insider trading? From Bloomberg:

    • “As US and Israeli bombs fell on Iran this weekend, bettors on Polymarket — where $529 million was traded on contracts tied to the timing of the strikes — were cashing in. Almost immediately, blockchain sleuths began hunting for unusual patterns in recent bets. Six accounts on Polymarket made around $1 million in profit by betting on the US to strike Iran by Feb. 28, according to analytics firm Bubblemaps SA. The accounts were all freshly created in February and had only ever placed bets on when US strikes might occur. Some of their shares were purchased, in some cases at roughly a dime apiece, hours before the first explosions were reported in Tehran.

  • I see Kalshi and others making the point that Polymarket is “offshore and unregulated.” That’s true. And it’s nice to point out? But that is it a bit of nuance that no one is going to care about at all. Also, the FBI and CFTC were both investigating Polymarket and decided in parallel that the company was doing nothing wrong. Then Polymarket was allowed to run a CFTC-regulated prediction market. Everyone signed up for laissez-faire handling of prediction markets; it’s a little late to have a problem with how hands-off it got. And it’s headquartered in New York, not a foreign country!

Finally, I will leave you with this:

One of the points of prediction markets is supposed to be getting us to “the truth” and probabilities of real-world events. This whole episode was basically the polar opposite of that at Kalshi. Again, if you want to let us bet/trade on a bloodless coup or him not dying, do that. The market aspired to be that, but was clearly not being traded (or promoted) as such. Mansour’s explanation about why the market is important is pretty lacking, because many of the scenarios that would lead to Khamenei being “out” include his death.

Also an aside, prediction markets definitely did not tell us Khamenei would be out before the end of the month. Kalshi’s last traded price before the strikes was 2%. Polymarket was trading at 1% on Friday night before money started coming in just before the strikes.

Turns out we still need the news.