Skin in the Game (Prediction Market)

The financial or reputational stake participants commit to in a prediction market, aligning their actions with true beliefs.

What is Skin in the Game (Prediction Market)?

Skin in the game refers to the financial or reputational commitment participants make when trading digital assets in a prediction market, ensuring their predictions reflect their true beliefs. As Sonal Chokshi and Alex Tabarrok discuss in the transcript, this distinguishes prediction markets from polls, as participants risk money or reputation (e.g., via tokens) when buying assets, like a $0.55 asset for a 70% believed probability, incentivizing accuracy. This was evident in the 2024 election, where Polymarket’s financial stakes led to more accurate forecasts than polls with low response rates (5%).

Beyond money, skin in the game can include reputation systems, as Scott Kominers notes, where participants earn tokens for accurate predictions, redeemable for prestige or further market access. For instance, Hewlett-Packard’s internal market gave employees $100 to trade, aligning their forecasts with sales outcomes. This mechanism counters the lack of accountability in media or polls, as Alex suggests journalists should bet transparently to reduce hyperbole, enhancing trust in their predictions.

Skin in the game is central to prediction markets’ effectiveness, driving truthful information aggregation for applications like elections or scientific replicability. Blockchain enhances this by enabling verifiable, transparent stakes, though misaligned incentives in thin markets can still distort outcomes.