The recent threat of a partial U.S. government shutdown has underscored limitations in how prediction markets like Polymarket and Kalshi define and resolve contracts tied to political events. Discrepancies in contract terms and settlement criteria have revealed how sensitive these instruments can be to technical wording when forecasting complex macro-political outcomes.
As lawmakers in Washington approached a potential lapse in federal funding, traders turned to prediction markets to express their views on whether a government shutdown would occur and, if so, how long it might last. Some of these markets saw very high implied probabilities, with certain contracts indicating an expected shutdown lasting multiple days.
However, closer scrutiny revealed that the precise contract language governing what constitutes a “shutdown” varies significantly across platforms, leading to divergent probabilities and outcomes for ostensibly similar events. For instance, some Polymarket contracts tie resolution to an official announcement from the U.S. Office of Personnel Management (OPM) that a shutdown has begun, whereas others, or similar contracts on Kalshi, may use slightly different criteria to determine settlement.
This variation in resolution rules matters because prediction markets rely on clear, unambiguous definitions of underlying events. When contracts differ in how they define key terms — such as whether a partial shutdown counts or what official trigger is used — the resulting odds can diverge, even when traders are betting on the same real-world outcome.
Shutdown markets expose ambiguity in event definitions and resolution rules
Critics argue that such contractual ambiguities can limit the effectiveness of prediction markets as tools for gauging real-world expectations about political risks. What might appear as a high probability for a particular outcome could instead reflect differences in contract wording rather than genuine market consensus.
Despite these limitations, the high trading volumes around shutdown contracts show that market participants continue to value prediction platforms as venues for expressing views on political and economic uncertainty. This episode highlights a broader challenge for the sector: ensuring that contract definitions are sufficiently precise and aligned with real-world conditions to provide meaningful signals.
Moving forward, developers and regulators alike may need to work toward standardized event definitions and settlement criteria if prediction markets are to serve as reliable indicators for complex political events beyond pure betting.
