Prediction Markets 101

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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on advanced indicators (like polls and surveys). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 60 times out of 100, the favored outcome will occur- and 40 times out of 100, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.


Any comment, Michael Giberson? :-D


Credits given to:

– Chris Masse-.

– Justin Wolfers.

Robin Hanson.

– Jason Ruspini.

– Caveat Bettor.

– John Tierney.

Jonathan Kennedy.

– Mike Giberson.

– Eric Zitzewitz.

– Cass Sunstein.

– Steve Roman,

– Nigel Eccles.

– The Everyday Economist.

– Adam Siegel.

George Tziralis.

– Leighton Vaughan-Williams.

– Emile Servan-Schreiber.

– &#8220-Thrutch&#8220-.

Panos Ipeirotis.

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