When the United States and Israel struck Iran's nuclear facilities last June, the operation surprised many observers. In contrast, when Operation Epic Fury began in the early hours of February 28, much of the world was awake and alert. This is what Jonathan Wahlberg writes for War on the Rocks.
Open-source analysts track the usual indicators of escalation: satellite imagery, repositioning of aircraft carrier strike groups and cryptic statements by officials. Intelligence agencies monitor missile deployments, while journalists cite inside sources. Energy markets, on the other hand, react to every rumor.
Amid this flood of signals, one stands out: Bookmakers are betting real money on when the strike will begin and whether it will happen at all. Betting platforms like Polymarket now host multimillion-dollar markets on geopolitical events. Before Operation Epic Fury, thousands were betting on whether Israel would strike Iranian nuclear facilities or whether the United States would intervene directly. These markets produce constantly updating probabilities—numbers that journalists, analysts, and even politicians increasingly cite as leading indicators of what informed observers believe will happen.
Most people assume that these numbers are just predictions. But in geopolitical crises, betting markets are no longer just prediction tools. They begin to influence the negotiation process itself. This happens in two ways. First, states or their associated actors can deliberately manipulate markets to create the appearance of inside information, turning financial transactions into signals of hidden intentions. Second, even without manipulation, market probabilities can shape expectations among journalists, investors, and governments, finely steering the dynamics of crisis escalation. Prediction markets therefore function not only as predictors of war but also as potential instruments in the signaling environment that precedes it.
While markets tied to military operations can encourage insider trading and distort decision-making, even perfectly regulated markets would alter the dynamics of crises. The problem is not just corruption. The problem is that market movements can be interpreted as credible signals of hidden intentions—and potentially used as such. The result is a feedback loop in which market prices can both reflect expectations and actively shape them.
For decades, scholars of international relations have argued that trust in crises comes at a cost. When a state wants to demonstrate resolve, it must take actions that would be painful to reverse: mobilizing troops, moving aircraft carriers, evacuating embassies, or imposing sanctions. Precisely because these actions are costly, they help convince adversaries that the threat is real.
Political scientist James Fearon distinguishes two forms of costly signaling. Leaders can "tie their hands" by creating political sanctions if they back down, or they can incur sunk costs by expending resources upfront to demonstrate seriousness. Mobilizing forces or deploying assets are classic examples.
Betting markets create a digital version of this logic, but with an important twist. Imagine an anonymous trader placing millions of dollars’ worth of bets predicting an Israeli strike. Within hours, the market probability jumps from 25 percent to 60 percent. The financial media claims that “the markets are now expecting war.” Analysts cite the jump as evidence that insiders are predicting an escalation. Iranian intelligence officials spot the spike. No one knows who made the trades. This uncertainty is precisely what gives the signal its power.
Governments cannot appear to be openly betting on prediction markets. The buyer might be someone with inside information: the head of a defense contractor, a politically connected investor, or an official with knowledge of classified discussions. To outside observers—including Iranian decision-makers—the trade may appear to be a money-making leak. The bet appears to reveal inside information, and because real money is at stake, the signal appears credible.
This is where deception comes in. A state could quietly encourage proxies, connected financiers, or intelligence brokers to move the prediction markets in ways that mimic insider trading. The goal would not be financial gain but rather the manipulation of expectations. In principle, a government could simply secretly and anonymously place the bet. A $3 million bet, which the United States would make, is far cheaper than mobilizing forces and could generate similar psychological effects at a fraction of the cost.
From Tehran’s perspective, the signal would be deeply ambiguous. Iranian leaders would have no way of knowing whether the price spike reflected genuine private information about impending military action or a strategic attempt to sway their beliefs. Ignoring the signal could be risky. If the deal really came from someone with inside information, rejecting it could lead to catastrophic mistakes. It is this ambiguity that makes signaling effective.
In a crisis environment already fraught with uncertainty, prediction markets can seem like windows into hidden information. A sudden spike in the perceived likelihood of war can seem like confirmation of rumors circulating in intelligence channels. This can suggest that people close to decision-makers are betting their own money on what they know is coming. Even leaving aside the risks of corruption, prediction markets change the very logic of costly signaling. They introduce a form of cheap, plausibly deniable signaling into crisis bargaining. Mobilizing an aircraft carrier strike group costs hundreds of millions of dollars and weeks of preparation. Moving a thinly traded geopolitical market may require only a few million dollars, a trivial sum for a state actor.
The psychological impact can be enormous. Prediction markets are supposed to aggregate scattered information, so that each price spike appears to be a collective decision rather than the action of a single actor. Observers suggest that many independent traders have updated their beliefs simultaneously. In reality, a single actor with deep pockets may be responsible.
This dynamic makes prediction markets uniquely suited to deception. Unlike official statements, which are easily dismissed as propaganda, market prices appear to arise organically from decentralized actors risking real money. They appear to be information discovered by the crowd. This illusion can shape strategic perceptions.
In many cases, signals could influence how leaders interpret the intentions of state actors and their allies. If markets suddenly hint that a strike is highly likely, hostile planners might conclude that decision-makers are already close to taking action. They can accelerate defense preparations, disperse assets, or rethink escalation. In this sense, the market becomes part of the bargaining process.
This strategy also carries risks. Prediction markets don’t just reflect expectations; they amplify them. Once journalists report that markets are assigning a high probability of war, those numbers begin to circulate in the financial media, intelligence briefings, and political commentary. What initially seemed like a signal of hidden information can quickly become a widely shared expectation of future action.
This dynamic creates the opportunity for strategic retaliation. A state that manipulates markets to signal resolve may inadvertently generate expectations that limit its own freedom to act. If markets suddenly suggest that a strike is highly likely, backing down later may look like weakness not only to adversaries but also to domestic audiences viewing the same numbers. In fact, a cheap signal designed to shape an adversary’s beliefs can create a new form of price that is relevant to the audience.
The result resembles a classic commitment trap. If markets coordinate their expectations around a particular outcome, then political leaders may face pressure to behave in accordance with those expectations, even if their strategic calculus changes. Deception designed to influence bargaining may therefore narrow the manipulator’s options, accelerating escalation rather than deterring it.
US regulators already have the authority to intervene in these markets. Under Title 17, Section 40.11 of the Commodity Futures Trading Commission, contracts involving terrorism, murder, or war are prohibited if they are deemed contrary to the public interest. However, enforcement has remained weak as prediction platforms have grown in scale and political importance. Recent legislative efforts led by Senators Chris Murphy and Catherine Cortez Masto have sought to tighten oversight of contracts based on events related to geopolitical crises, while Senator Jeff Merkley has proposed a ban on government officials. The debate highlights a deeper problem. Even if regulators eliminate insider trading or corruption, the strategic signaling effects of these markets will remain.
Prediction markets are designed to predict the future, but in geopolitics, predictions can shape behavior as well as predict it. As these platforms grow and liquidity deepens, they will become increasingly visible to governments, intelligence agencies, and adversaries. Once states realize they can use markets to send misleading signals about inside information, prediction platforms will become a new arena of strategic competition. By the time officials determine who has been driving the market, the strategic implications may already be locked in.
Current global crises still revolve around missiles, centrifuges, and aircraft carriers. But the first sign of escalation may not come from radar. It may come from a sudden spike in odds.