Betting versus investing: why crowds win in one but not the other

Prediction markets and sports betting have grown quickly, and both price outcomes about as accurately as the stock market prices companies. A new Morgan Stanley report weighs betting versus investing and explains why that shared accuracy leaves almost every bettor out of pocket and almost every long-term investor ahead.

Of the 2.4 million people who have traded on the prediction market Polymarket, 69 per cent lost money. Among those who came out ahead, the top 1 per cent captured 77 per cent of the profits and the top 10 per cent captured 96 per cent. Pat Akey, Vincent Grégoire, Nicolas Harvie and Charles Martineau reached those figures after examining nearly 600 million trades placed between November 2022 and March 2026.

The obvious reading is that the market is broken. A report published this month by Morgan Stanley's Counterpoint Global points somewhere else. Michael Mauboussin and Dan Callahan argue that the market works, which is why so few people beat it.

What makes a crowd accurate

Mauboussin and Callahan build on James Surowiecki's argument that crowds produce good estimates when three conditions hold: cognitive diversity, a way of aggregating views and incentives that reward being right. At a show in Plymouth in December 1906, 800 people paid sixpence each to guess the dressed weight of an ox. Of the 787 usable entries, the average guess was 1,197 pounds — the ox's actual weight. Francis Galton, who did the sums afterwards, seems to have been surprised by how well the crowd had done. The average individual guess was off by 4.4 per cent.

Betting markets meet all three. Across more than 72 million trades on Kalshi, the rate at which outcomes occurred tracked the probabilities implied by contract prices closely. The same pattern appears in roughly 400,000 football matches drawn from more than 6,000 leagues, and in about 30,000 horses running in 2,400 races. Distortions exist. Favourites win slightly more often than their odds imply, and long shots slightly less. But the mispricing is too small to cover the cost of betting on it.

Betting versus investing: where the arithmetic parts company

So why do so few bettors make money in markets priced this well?

Because betting markets are zero-sum before costs. Every winner is paid out of the losers' stakes, and the operator takes a cut in between. On straight sports bets that cut is around four to five per cent of the stake. In parimutuel horse racing, where bettors wager against each other in a pool, the takeout runs from 15 to 24 per cent.

The stock market is zero-sum only in relative terms. Some investors beat the index and others lag it, but the businesses underneath tend to grow, so the market as a whole can rise. Mauboussin and Callahan set the difference out in cash: American equities generated $91 trillion above the return on Treasury bills over the 100 years to 2025, while American gamblers lost $3.9 trillion nominally, or $5.8 trillion in 2025 money, between 1929 and 2025.

Costs point the same way. The stock market is much cheaper to enter than any of the other three, and nearly all long-term investors in US stocks have made money, including those who never matched the index.

What bettors think is happening

Little of this appears to register. Among sports bettors surveyed, 39 per cent said they win more often than they lose and 28 per cent said they break even. Estimates put the share who are unprofitable over the long run at 95 per cent or more.

That gap between self-assessment and outcome will be familiar to anyone who has looked at how investors rate their own trading.

The market that never settles

One difference favours the betting markets. They settle. A race is run, a match ends, a contract pays out, and the result corrects any price that had drifted too far from reality.

The stock market never settles. A company's worth rests on cash flows that will not arrive for decades, so there is no day on which the crowd finds out it was wrong. That absence of a reckoning, the authors argue, is why the stock market is the most prone of the four to what they call diversity breakdowns: the moments when investors stop thinking independently.

Betting markets have a milder version. The 24 horses that reached the Belmont Stakes with a Triple Crown in prospect between 1950 and 2026 carried an average implied win probability of 61 per cent. Only 20.8 per cent of them won.

Two caveats. The report is a research note from an active manager rather than peer-reviewed work, and several of its figures come from working papers. It also deals only with American markets.

Neither disturbs the arithmetic. In the betting markets, the crowd's accuracy is what stands between a bettor and a profit. In the stock market, that accuracy is the reason an investor does not have to beat anyone to make money.

Resources

Mauboussin, M. J., & Callahan, D. (2026). The wisdom of crowds in markets: Crowd behavior in prediction, betting, and stock markets. Counterpoint Global Insights, Morgan Stanley Investment Management.

Akey, P., Grégoire, V., Harvie, N., & Martineau, C. (2026). Who wins and who loses in prediction markets? Evidence from Polymarket. Working paper.

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