What are prediction markets?
Prediction markets are specialized, small-scale financial markets operated to predict future events. While traditional markets exist to allocate resources, prediction markets are conducted solely for using the information contained in prices to make predictions about future events. The operators of prediction markets define artificial financial instruments or contracts based on some event of interest. The ultimate value of the contracts is contingent upon the outcome of that event. Using our research interests as an example, a typical question would be Does the influenza vaccine being produced now include the dominant strain of influenza that will circulate next season? In such a market, participants who are interested in the topic are invited to buy and sell contracts for yes and no throughout the influenza season until the answer is revealed in a pre-specified source (e.g., data from the World Health Organization). Traders participating in the market have information about the event
Prediction markets are a system for predicting the likelihood of various events, and making money off accurate predictions. About a dozen exist and are open to the public, including the Popular Science Predictions Exchange, TradeSports, the Iowa Electronic Markets, NewsFutures, Bet2Give, Hollywood Stock Exchange, The simExchange, Intrade, and Betfair. They are generally centered around a general domain of predictions, such as politics, movies and films, and technology and futurism. Other names for prediction markets include decision markets, information markets, idea futures, event derivatives, and virtual markets. The basic idea of a prediction market is that more accurate predictions will emerge from the betting activity of the collective, which rewards accurate predictions through wins and punishes inaccurate predictions through losses. However, many prediction markets use imaginary money rather than real money. Still, evidence shows that prediction markets using fictional money can
“The online prediction market is a forecasting tool where contracts for specific event outcomes (e.g., “Bush wins election�?) are bought and sold and their price reflects the probability that the outcome will take place. Prediction markets have garnered attention for their ability to accurately predict the future, often days and weeks before it arrives.” Via CDMS “Individuals trading in a market vie to out-predict others. It is this competition that provides useful information that amasses to generate forecasts interpretable through contract prices. Contracts are valued between $0 and $100 dollars, interpretable as a probability. A contract value increases (the event becomes more probable) only with a commensurate decline in value of the other contracts (a decline in their likelihood). Prices fluctuate as traders buy and sell stocks in contracts.” “There are two ways traders earn money. One, those who buy low and sell high correctly predicted an increase in contract value and thus
Prediction markets are specialized, small-scale financial markets created to help experts forecast future events. While traditional markets are mechanisms to allows people to easily buy and sell goods and commodities, prediction markets exist to generate a market “price” that will be an accurate predictor of a future event.
