Prediction Market

A market where participants trade digital assets to forecast the outcome of future events, with prices reflecting aggregated probabilities.

What is Prediction Market?

A prediction market is a speculative market where participants buy and sell digital assets tied to the outcome of specific future events, such as elections or product launches. The price of these assets reflects the market’s collective belief about the probability of the event occurring—for example, a digital asset priced at $0.70 for a candidate winning an election implies a 70% chance of victory. Unlike traditional polls, prediction markets incentivize participants to act on their true beliefs by putting financial stakes (“skin in the game”) into their predictions, making them a powerful tool for forecasting. They were pioneered in 1988 with the Iowa Political Prediction Markets, designed explicitly to produce accurate predictions by aggregating dispersed information.

These markets leverage the “wisdom of the crowds,” where diverse participants, each with partial information, contribute to a collective forecast that often outperforms individual or expert predictions. For instance, in the 2024 U.S. presidential election, prediction markets like Polymarket accurately forecasted outcomes better than polls, which suffered from biases like low response rates (e.g., 5% for modern polls versus 60% historically). However, their effectiveness depends on market thickness (participation volume) and the absence of manipulation, as thin markets or coordinated distortions can skew results.

Prediction markets are not limited to political events; they’ve been used internally by companies like Hewlett-Packard to predict printer sales and externally to assess scientific paper replicability. By enabling participants to trade on their knowledge, prediction markets create a public good by surfacing valuable, aggregated information that can guide decision-making in various domains.