The arrival of prediction markets in Canada is giving parents something new to worry about. They’re flashy, fun and easy to use. They’re also highly addictive, open 24/7 and, for most users, a money-losing endeavour.
In a nutshell, prediction markets allow users to place bets on financial, economic and climate-related events.
And by all indications, young people are attracted to them.
In the United States, where the market is more developed, about one-third of Gen Z (that’s 14- to 29-year-olds) are either participating in or plan to participate in prediction markets or sports betting, according to a study Northwestern Mutual conducted earlier this year. A separate study by Betterment found about one-quarter of Gen Z investors say they consider sports betting a deliberate part of their long-term financial strategy.
But for most people, prediction markets are far from a legitimate investment strategy. A recent study showed that just 1 per cent of the users on the U.S.-based Polymarket platform captured about 77 per cent of the profits, and those winners adopt complex strategies that most people would not be able to deploy.
Editorial: The risky bet of prediction markets
For parents with children over the age of majority, there’s little we can do to stop them. They can participate in these markets starting at 18 or 19, depending on their province.
Still, it’s worth a shot. You could start by having them read Wealthsimple’s explanation of the risks involved. That might be enough to scare them away because the risks are quite complex.
They need to understand liquidity risk – the chance that you can’t get out of a contract at a decent price because of a lack of buyers – as well as information asymmetry and market manipulation. Risk goes way beyond just getting your bet wrong.
Let them read about the gambling-like nature of prediction markets – despite the efforts of the two companies that offer the service in Canada to market it as investment.
Wealthsimple is a financial company with roots in online investing and managed investing. Its slick webpage has wager information scrolling along the bottom ticker-tape style, like a stock market, calling a bet a “tradable position.” Interactive Brokers’ video on the topic refers to participants as investors.
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It all looks a lot like investing. Guide your children toward seeing that it’s not, including reading the details about how unlikely they are to actually make money.
If your young adult kids want to invest, help them do it properly. If you don’t have the skills to help them open an online brokerage account and invest in index-tracking exchange-traded funds – the most reliable way to make money through investing – then find someone who does or find appropriate resources online. There are plenty of them.
The greater opportunity lies with younger children. Setting them up with good financial habits and acting as a positive role model are the best defences against risky financial behaviour later in life.
The most impactful thing you can do is talk about money. When you make it part of regular conversation, kids learn that managing money responsibly is part of being an adult.
Be open about your income and expenses, and how you manage your own money. Discuss what kind of vacation your family can afford, and how much you’ll be contributing to their education.
Opinion: Put plainly, prediction markets are not for you
Get them a bank account at a young age, and have them do the talking when opening an account or when they need help from customer service. Have them open a tax-free savings account when they reach the age of majority, and get them investing in index-based ETFs.
One teaching opportunity that I feel strongly about is allowing kids to make their own decisions about spending money, starting when the stakes are low.
Feeling the impact of making a poor choice is the best way to learn about being responsible with money. Give them the opportunity to build their skills so they will be better prepared for bigger money decisions later on.
However, this does not apply to prediction markets. No amount of betting is a good idea for young people – it’s simply too easy to get pulled in.
While prediction markets are not the only money-related pitfall to tempt our children, they are maybe the most dangerous. Build your own understanding of how they work so you can talk to your kids about it.
Anita Bruinsma is a Toronto-based certified financial planner and a parent of two teenage boys. You can find her at Clarity Personal Finance.