Saying Goodbye to a Complex Adaptive System
Until the US reforms its inefficient tax treatment, back to Fidelity and exploring Kalshi
Financial, prediction, and sports markets
The enjoyment I derived for a fleeting duration from sports betting, beyond benefiting from high CAC budgets, was from being able to participate in a complex adaptive system. Financial markets are the pinnacle example of a complex adaptive system, as it has various actors whose actions creates explicit and implicit effects that other participants adjust to, and on and on it goes until the heat death of the universe, ie MSFT’s pre-market activity on this Sunday evening to the weekend’s OpenAI pseudo-coup. Sports betting is the same, with the bookies and their odds providers and professional and retail bettors. It’s fun being part of the volume of a (low volume OTC ADR), and the same goes for betting where you make a bet early, and you see the bookies adjust the odds in a way that hints that you incorporated information the bookie did not. (Bookies using early odds to let sharp bettors provide guidance.)
Another lens is say a security is trading at 50 times earnings. As a market participant, I get to determine if I agree or disagree with the market, and then determine how I want to react. Do I intend to deploy capital to go long or short, or move on. The same goes for betting; do I agree with the bookies that Nicaragua at home deserve 10.5 odds while a struggling Mexico is priced at 1.65? Different time horizons and nature of capital differentiates these systems, as a security’s lifetime is theoretically infinite whereas a sporting event is finite which imply different cash/bankroll management, etc. It is pompous to deny that the financial reward aspect is a marginal draw, but ultimately marginal due to diminishing marginal returns and potential loss of novelty. The financial return past a certain point may instead come from the simple confirmation of your analysis being correct.
A preliminary exploration of the prediction market Kalshi ticks a similar inclination. While arguably not a literal complex predictive market as prediction markets do not (or should not) directly impact the underlying participants, the same pattern of being rewarded to analyze and then have conviction exists.
The last reason I will say is a quote from Paul Tudor Jones: “I got to be a trader probably because when I was really, really young I was a game fanatic. I played every single game that there was — Monopoly, Life, Parcheesi, poker. I used to play hours of solitaire. I just loved playing games”. Complex adaptive systems, from financial markets, to sports and predictions, are competitive. It’s simply gratifying to learn and improve and be part of a complex adaptive system.
Musings on the US’ Tax Treatment of Betting
Consider me surprised when I discovered that many countries do not tax the bettor, but instead solely the sportsbook for gambling and betting. Congrats to jurisdictions like Canada and Austria for optimizing tax incidence. It is a bit silly that the US tax system relies on the bettor to self report his gross winnings. The venn diagram of accurate tax reporter who understands the IRS’ non-explicit guidance and your average sports bettor is likely marginal. The utility of taxing betting is to generate revenue, so it makes sense that the party that will pay taxes accurate (the sportsbook) should take the burden, instead of there being massive leakage in tax revenues.
The sportsbooks may complain, but their incentives in the existing or superior international model is to increase bet and dollar volume which is not impeded. There are other social justice reasons like AGI, vulnerable populations more likely to bet and be unaware, etc. Given the number of countries that place the full tax burden on the sportsbook (and the reasonable public market performance of those companies), it is reasonable to question why the US is the outlier.
A tongue in cheek answer is that this tax treatment is yet another legacy of the Puritan origins of the United States, which is only another piece of evidence that the British were right to chase them out.