Thick Market/Thin Market

A thick market has many participants trading high volumes, ensuring robust information aggregation; a thin market has few participants and low volumes, risking inaccurate predictions.

What is Thick Market/Thin Market?

In prediction markets, a thick market is characterized by a large number of participants trading substantial volumes of digital assets, leading to robust price discovery and accurate aggregation of dispersed information. Conversely, a thin market has few participants and low trading volumes, making it susceptible to distortions and less reliable predictions. As Alex Tabarrok and Scott Kominers emphasize in the transcript, thick markets attract diverse information sources, such as local insights or expert models, which enhance forecast accuracy, as seen in the 2024 U.S. election markets on platforms like Polymarket.

Thin markets, however, suffer from limited participation, reducing the diversity and strength of information signals. For example, the transcript notes that the 2016 election and Brexit prediction markets were less accurate partly because they were thin, with fewer participants and lower stakes, limiting incentives to gather precise information. Thick markets benefit from “organic demand” (e.g., hedgers in commodities markets), which subsidizes informed traders (“sharks”), whereas thin markets rely solely on these sharks, making them less competitive and reliable.

The distinction is critical for market design: thick markets produce public goods like accurate forecasts, while thin markets may require subsidies or alternative mechanisms (e.g., peer prediction) to function effectively. Legalizing prediction markets, as Alex suggests, could thicken them by allowing broader participation, improving their predictive power for applications like elections or scientific replicability.