If you followed the World Cup at all this summer, it was more or less impossible NOT to hear about Kalshi and Polymarket.
In case you don’t know they are prediction markets. You buy a contract on whether something will happen, priced somewhere between a penny and a dollar depending on where the money lands. Get it right, the contract pays out a dollar. Wrong, it’s worth nothing. Sorta like a stock market where the stocks are just outcomes.
I live in Washington, where gambling is tightly controlled and online gambling is flat out illegal. Sports bets have to be placed in person at a tribal casino. So no FanDuel, no DraftKings, no BetMGM.
But prediction markets seem to be fine. At least for now.
So I thought, sure, I’ll try this out. I like sports, so I started with sports. Loaded up a couple hundred dollars and started predicting baseball games.
I think I’d have been okay if I’d just picked winners. But I decided to try parlays. A parlay is when you stack several predictions into one bet and every single one has to hit for you to get paid. Miss one leg and the whole thing dies.
That’s where they get you. Picking a winner might make you twenty bucks, maybe fifty, depending on how much you wager. A parlay could make you a few hundred. Maybe a few thousand.
So how hard could it be? Just pick whoever’s favored to win and string some of those together.
Turns out it’s actually pretty hard.
Okay, maybe sports isn’t the way to do this. But I like cryptocurrency, and sure enough, Kalshi has that too. So I started playing around with the markets on the price of Bitcoin and Doge and Ethereum.
At first it went pretty well. Won ten dollars here. Fifty there. A hundred somewhere else. Thinking I had unlocked some kind of secret money printing machine, I decided to go all in.
Aaaand I lost two hundred dollars in five minutes.
Undaunted, I figured that’s just the tuition you pay for learning. So I decided to pay more tuition and loaded up another few hundred.
Over about thirty-six hours, here’s what that tuition taught me.
There is no secret sauce. There is no shortcut. The game is rigged against you. Kalshi is immensely profitable, running around two billion dollars in annualized revenue, and roughly nine out of every ten of those dollars comes from sports. It felt like nine out of every ten of those dollars came from me to be honest.
So why am I telling you this? Or more to the point, why am I telling my wife this through a newsletter?
Because this week I want to talk about the illusion of control, the one question that separates skill from luck, and where to put your effort once you know the difference.
You Are the Pigeon
In 1948, the psychologist B.F. Skinner ran an experiment that should be required reading for anyone with a betting app on their phone.
He put eight hungry pigeons in boxes. Each box had a feeder hooked to a timer. Every fifteen seconds, food dropped in. That’s it. The birds didn’t have to peck anything, press anything, or earn anything. The food came no matter what.
The pigeons, however, didn’t know this.
Most of the pigeons invented rituals. One bird turned counterclockwise between feedings, two or three full spins, like clockwork. Another kept shoving its head into the corner of the box. Two of them developed this pendulum swing of the head, back and forth, back and forth, waiting for the food gods to deliver.
Each bird had done something right before the food showed up. So it did that thing again. And sure enough, more food came. The spin was working. The head bob was working. Every fifteen seconds, sweet confirmation.
The birds had cracked the code. But as you can guess, there was no code. There was just a timer.
I’d love to sit here and laugh at the pigeons with you....heh stupid pigeons. We eat them as squab ya know. Buuuut I spent a day and a half doing the head bob on a crypto market, so I am more or less a pigeon pecking his beak at a MacBook.
Won ten dollars. I must be reading the markets right. I won fifty...I’ve discovered the pattern!
Then the timer did what timers do.
And since we are being honest, this wasn’t really about one bad run on Kalshi. I have spent years feeling like I was dancing on the edge of some thing I could solve. Like there’s a secret pattern to all of it, and I keep getting close, and if I could just decipher the puzzle, the rest of life unlocks. Push the right buttons, walk the right steps, and boom you play the back nine on easy mode.
And I’d wager I’m not the only one who feels this way.
That feeling of being close is real. I’m not here to take it from you. The question worth asking is different, and it’s the one I skipped:
how do you know whether you’re actually close, or whether you’re a pigeon with a good spin going?
Turns out there’s a one-question test for that.
Can You Lose On Purpose?
This fun little test comes from a guy named Michael Mauboussin, an investment strategist who teaches at Columbia and wrote a book called The Success Equation.
His big idea is that what we do sits on a continuum. On the far left end, pure luck. Roulette, the lottery, coin flips. On the far right, pure skill. Chess, running a mile, playing the piano. Everything interesting in life lives somewhere in the middle, and the useful question is never “is this skill or luck?” It’s “where on the line am I standing?”
Which brings us to the test. If you want to know how much skill is involved in something, ask yourself one question.
Can you lose on purpose?
Sit with this for a minute. You can throw a chess match. You can shank a golf shot into the water whenever you choose. A pro poker player can fold every winning hand all night long. When you can lose on purpose, skill is involved. And when skill is involved, getting better at the thing pays off.
Now try losing on purpose at roulette. You can’t. You can only bet and wait. And if you can’t lose on purpose, you can’t win on purpose either. You’re just along for the ride.
So let’s grade my little Kalshi adventure shall we. Could I lose on purpose predicting whether Bitcoin would be above some price at 3 AM? Nope. I could bet wrong, sure. But I couldn’t reliably be wrong any more than I could reliably be right. Therein lies the rub. My wins weren’t actually evidence of a skill I was developing.
The trouble is that when you are standing in the center of the continuum, you can’t feel the difference. And the near-misses are actually the worst offenders. Researchers at Cambridge found that almost winning cranks up your desire to keep playing, and the effect gets stronger when you had a hand in setting up the bet. Losing a parlay by one leg doesn’t feel like losing.
It feels like progress.
You were so close.
I mean so close.
But close only counts where skill lives. On the luck end of the spectrum, close is just a story you tell yourself between bets.
So the test tells you where you’re standing. The next question is what to do about it.
What To Do At Each End
Okay that little test is only handy if you do something with the answer. So here’s the something.
If you find yourself on the skill end of the continuum, the answer is kinda boring...and beautiful. What you need is practice practice practice. Every hour you put in compounds, and the feedback you get is mostly telling you the truth. Miss a putt, you can see why. Bomb a presentation, you can watch the tape. The world is grading your work honestly, so more work makes you better. Writing, coding, cooking, playing an instrument, running a business. Grind away my friends. The grind is what matters here.
If you’re on the luck end, more reps buy you nothing. nada. zilch. My thirty-six hours of crypto contracts didn’t make me a sharper trader. They made me a very experienced loser. On this end of things you only control two things: your process and the size of your bet. That’s it. Decide what you’re willing to lose before you play, and treat any win as sunshine. Nice when it shows up, but nobody’s out here claiming they caused it. (I live in Seattle. We notice sunshine. We do not take credit for it.)
And if you’re somewhere in the middle (which is most of life) do both. Poker players get this. They can’t control the cards, so they pour everything into what they can control: the decisions, the discipline, the bankroll. Good process, then let the outcome be the outcome.
Oh and hey, there’s one more wrinkle, and it kinda explains why the luck end fooled me so badly. A psychologist named Robin Hogarth split the world into kind and wicked learning environments. Kind environments give you fast, honest feedback. Golf is kind (sorta). The ball goes where you hit it, every time, no notes. Wicked environments give you feedback that’s delayed, missing, or flat-out lying. Kalshi was lying to me. Every win said keep going, you’re learning. I was getting feedback. It just wasn’t true.
So before you trust what an experience is teaching you, ask whether the environment is honest enough to teach. Some places, effort makes you better. Other places, effort just makes you weary.
And me? I’ve decided my effort was pointed at the wrong end of the spectrum. Which brings me back to the tuition.
In Conclusion
I firmly believe losses are tuition. But tuition only counts if you actually attend the class.
For my part, I learned the difference between a game that rewards effort and a game that just lets me play. I learned that a winning streak isn’t the same as a skill. And I learned to ask one question before I pour myself into something like this: can I lose on purpose?
That’s a fair price. Honestly, I’ve paid more and learned less.
But now if you’ll excuse me, I have to go explain all of this to my wife who is reading this and wondering what the actual f**k. And I’d point out, explaining this is a task that sits firmly on the skill end of the line but I will take all the luck I can get. Cause as they say, any sofa is a sofa bed when you lose a bunch of money on Kalshi.
Ever Forward,
— Derek (aka Chief Rabbit)
P.S. Wild timing update! I was minutes from sending this newsletter out when Kalshi emailed me this: “Washington has officially blocked access to its sports, politics, and culture markets.” You know what's still open? Crypto. The one market in this entire story that took most of my money remains fully legal in my state. Cool cool cool.
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