Podcast Title: The Prof G Pod with Scott Galloway
Episode: First Time Founders with Ed Elson – How Kalshi Made it Legal to Bet on this Election
Host: Ed Elson
Guest: Tarek Mansour, Co-founder and CEO of Kalshi
Published by: Vox Media Podcast Network
Episode Duration: Approximately 53 minutes

Introduction to Kalshi and the Unique Election Betting Market

[01:49] Ed Elson:
The episode opens with Ed Elson introducing the concept of Kalshi, a pioneering platform that has made it legal for Americans to bet on future events, including elections. He highlights the uniqueness of this development in U.S. history and introduces Tarek Mansour, the CEO of Kalshi, who has successfully navigated the regulatory landscape to bring this idea to fruition.

[03:29] Tarek Mansour:
Tarek expresses excitement about the discussion and delves into his personal experiences, sharing a humorous anecdote about a TikTok video featuring an Uber driver betting on Kalshi during a Tesla ride. He clarifies that while Kalshi has legalized betting on events like elections, it does not condone betting while driving, emphasizing safety and responsibility.

Understanding Kalshi: The First Legal U.S. Prediction Market

[06:29] Ed Elson:
Ed seeks to clarify for listeners what Kalshi exactly does, prompting Tarek to provide a comprehensive overview.

[06:33] Tarek Mansour:
Kalshi is described as the first legal prediction market in the United States where users can bet on binary outcomes—yes or no—regarding a wide array of future events. Examples include political elections, weather patterns, economic indicators like inflation rates, and legislative changes. Tarek emphasizes that while Kalshi covers many event types, it excludes violent events and sports for now.

Genesis of the Idea: From Goldman Sachs to Creating a Transparent Exchange

[07:05] Ed Elson:
Ed inquires about the inspiration behind Kalshi's inception.

[07:01] Tarek Mansour:
Tarek recounts his time at Goldman Sachs and Citadel during the tumultuous 2016 election and Brexit periods. He observed that institutional investors were keenly interested in hedging against political outcomes but faced high fees and limited accessibility. This realization sparked the idea of creating a transparent, exchange-based platform akin to the New York Stock Exchange, where anyone could trade on event outcomes with fair fees.

Navigating Legal Challenges and Regulatory Hurdles

[08:22] Ed Elson:
Ed probes into why betting on elections was previously illegal, seeking to understand the regulatory barriers Kalshi had to overcome.

[08:28] Tarek Mansour:
Tarek explains that although prediction markets have historical precedent, they often face scrutiny under gambling laws. Unlike commodities where traders hedge natural risks (e.g., farmers speculating on grain prices), betting on political outcomes was deemed gaming without economic value, leading to its illegality. Kalshi spent three years lobbying and working with the Commodity Futures Trading Commission (CFTC) to demonstrate the economic relevance and risk transfer benefits of legalized prediction markets.

Notable Quote:
Tarek Mansour: “We just gotta ride it out. It was a war of attrition. And you have to just keep pushing and keep your conviction.” [03:15]

Kalshi vs. Traditional Betting and Stock Markets

[14:06] Ed Elson:
Ed posits that much of the stock market involves gambling-like speculation and questions Kalshi’s stance on this comparison.

[14:13] Tarek Mansour:
Tarek agrees, drawing parallels between Kalshi and traditional markets. He differentiates Kalshi by highlighting its regulated nature, absence of a house that sets skewed odds, and reliance on market-driven supply and demand to set fair prices. Unlike casino betting where the house typically has an advantage, Kalshi allows users to trade directly with one another, ensuring transparency and fairness.

Notable Quote:
Tarek Mansour: “Kalshi is not always negative EV in our markets.” [17:33]

Addressing Bias and Accuracy in Prediction Markets

[27:12] Ed Elson:
Ed brings up concerns about demographic biases within Kalshi’s user base, noting that 90% of Kalshi users are men, which could skew the market’s accuracy regarding election outcomes.

[27:49] Tarek Mansour:
Tarek acknowledges the demographic skew but argues that the trading behavior of women on Kalshi does not fundamentally bias the market towards any particular outcome. He emphasizes that prediction markets rely on participants acting in their self-interest to make accurate predictions, supported by institutional liquidity from firms like Susquehanna and SIG.

Notable Quote:
Tarek Mansour: “Smart money brings back the prices to where it should be because there is incentive to do so.” [32:30]

Kalshi’s Business Model and Competitive Landscape

[35:43] Ed Elson:
Ed shifts the conversation to Kalshi’s business mechanics, asking how the company generates revenue.

[35:50] Tarek Mansour:
Tarek explains that Kalshi operates similarly to stock exchanges, earning revenue through transaction fees of 1-2% per trade. Additionally, Kalshi differentiates itself by offering variable interest on deposited funds, fostering an ecosystem where users can earn on their open positions. He notes the high upfront costs due to regulatory compliance and infrastructure development but underscores the low marginal costs as the platform scales.

[37:39] Tarek Mansour:
Regarding competition, Tarek identifies offshore crypto-based prediction markets like Polymarket but highlights their lack of regulation and prevalence of wash trading. He asserts that Kalshi’s regulated status ensures trust and reliability, making it the preferred choice for American users.

Founder’s Journey: Overcoming Insecurities and Building Conviction

[41:18] Ed Elson:
Ed invites Tarek to share his personal entrepreneurial journey, exploring what inspired him to establish Kalshi.

[41:34] Tarek Mansour:
Tarek details his background, growing up in Lebanon and Brazil before meeting his co-founder, Luana Lopez Lara, at MIT. Both were passionate about mathematics and finance, but the idea of a regulated prediction market organically emerged from their collective experiences and observations in the financial industry.

[46:28] Ed Elson:
Ed asks how Tarek builds confidence, especially given the public scrutiny and pressure of leading a highly visible company.

[46:28] Tarek Mansour:
Tarek admits to having insecurities and not being naturally confident. Through facing public challenges—both positive and negative—he has learned to detach personal identity from company outcomes. Emphasizing hard work, resilience, and maintaining a long-term perspective, Tarek underscores the importance of focusing on daily efforts rather than external validations.

Notable Quote:
Tarek Mansour: “Nothing is ever as good or as bad as it seems.” [50:28]

Future Predictions and Closing Thoughts

[52:00] Ed Elson:
As the conversation nears its end, Ed seeks Tarek's expert opinion on the upcoming election.

[52:00] Tarek Mansour:
Tarek refrains from making definitive personal bets, citing his role as Kalshi’s CEO. However, he trusts Kalshi’s market indicators, noting a 60% probability in favor of Kamala Harris but emphasizes the race remains a close coin flip. He encourages listeners to consider both polls and market-based predictions to form a more comprehensive understanding of electoral dynamics.

[53:10] Ed Elson:
Ed concludes the episode by thanking Tarek for his insights and contributions, acknowledging the valuable perspective Kalshi provides in the realm of prediction markets.

Key Takeaways and Insights

• Regulatory Innovation: Kalshi stands out as the first legal prediction market in the U.S., achieved through persistent regulatory advocacy and demonstrating economic value in event-based trading.

• Market Fairness: Unlike traditional gambling venues, Kalshi ensures fair play by allowing users to trade directly without a house advantage, relying on market-driven pricing mechanisms.

• Economic Relevance: Prediction markets like Kalshi’s can serve as valuable tools for gauging public sentiment and forecasting events, complementing traditional polling methods.

• Business Model: Kalshi operates on a transaction fee basis, similar to stock exchanges, and distinguishes itself through regulated operations and offering variable interest on user deposits.

• Founder’s Resilience: Tarek Mansour’s journey underscores the importance of perseverance, hard work, and maintaining a long-term vision despite external pressures and personal insecurities.

• Market Accuracy vs. Polling: While Kalshi’s markets offer real-time insights based on user behavior and institutional participation, they are not meant to replace polls but rather to complement them, providing a multifaceted view of future events.

Notable Quotes

• Tarek Mansour on Overcoming Challenges:
  “We just gotta ride it out. It was a war of attrition. And you have to just keep pushing and keep your conviction.” [03:15]

• Tarek Mansour on Market Fairness:
  “Kalshi is not always negative EV in our markets.” [17:33]

• Tarek Mansour on Prediction Accuracy:
  “Smart money brings back the prices to where it should be because there is incentive to do so.” [32:30]

• Tarek Mansour on Founder’s Resilience:
  “Nothing is ever as good or as bad as it seems.” [50:28]

Conclusion

This episode of First Time Founders offers an in-depth exploration of Kalshi, a groundbreaking platform that has redefined the landscape of prediction markets in the United States. Through candid discussions, Tarek Mansour provides listeners with valuable insights into the challenges and triumphs of establishing a regulated betting platform, the intricate balance between regulation and market freedom, and the personal journey of leading a disruptive startup. For anyone interested in the intersection of finance, technology, and regulation, this episode serves as a compelling case study of innovation driven by conviction and resilience.