A Prediction Market is a virtual share market. It is used to compile information.
1. Two shares are created on the Prediction Market. These shares describe an event, e.g. “Deadline can be met” and “Deadline CANNOT be met”. Each share pays 100 points if the given event occurs, and 0 points if the event does not occur. Thus, if the deadline is met, the first share pays 100, while the other share is worth nothing.
2. Invited are people who are believed to have relevant knowledge and information to trade in the shares.
3. The participants buy the share that they believe offers them the best chance of making money*. Thus, the price of the share that the majority of participants want to buy will increase; and the price of the share that no one believes in will decrease. In other words, the share price reflects the participants’ overall assessment of whether or not the event will occur.
*The money may be real, virtual or in the form of prizes.
I prefer when there is only one contract. So when you speculate on the “no” side of the bet, you simply short-sell the “yes” contract.
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Chris Hibbert’s Explainers:
- PM Intro: Basic Formats – [simple double auctions] – by Chris Hibbert – 2005-12-30
- PMs with Open-Ended Prices – [markets with open-ended prices] – by Chris Hibbert – 2006-01-05
- Looking at Both Sides – [the symmetry of complementary purchases] – by Chris Hibbert – 2006-04-17
- Market Design: Book and Market Maker – [how to integrate an order book with an automated market maker] – by Chris Hibbert – 2006-04-28
- Increasing Liquidity in Multi-Outcome Claims – [the mechanics of multi-outcome markets] – by Chris Hibbert – 2006-07-19
- Continuous Outcomes: Bands, Ladders, and Scaled Claims – [predicting the value of a continuous variable] – by Chris Hibbert – 2006-09-20
- Integrating Book Orders and Market Makers – (mirror on MO) – by Chris Hibbert – 2006-09-20
- Conditional and Combinatorial Betting – (mirror on MO) – by Chris Hibbert – 2007-03-06
- Market Makers for Multi-Outcome Markets – (mirror on MO) – by Chris Hibbert – 2007-09-10
