Charles Plott has nailed it.

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I would lay out this dichotomy:

• Some of our academics, consultants, and exchange executives have sold the prediction markets as the ultimate forecasting tool &#8212-which is true, but people translated that as &#8220-this is an omniscient tool for forecasting&#8221-–
• The best usage of the prediction markets is that they do average what the experts think (see Justin Wolfers&#8217- mention of a &#8220-useful counterweight&#8221-) &#8212-but that&#8217-s a far cry from being an omniscient oracle (which is what people are expecting).

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Some people would enjoy the usage of a &#8220-useful counterweight&#8221- &#8212-but not that many.

The &#8220-useful counterweight&#8221- thing is not a hot-selling proposition.

You don&#8217-t draw crowds with that.

You draw crowds with an over-selling proposition.

You draw crowds by manufacturing hype.

As a result of the collective intelligence of more than 77,000 bettors on Intrade, the prices on the site may be a good way to predict the outcome of current events &#8212- more accurate than some polls and pundits. In 2004, the market odds on Intrade predicted the presidential vote of every state but Alaska. In 2006, the odds correctly indicated the outcome of every Senate race.

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Our Explainer On Prediction Markets

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 the advanced indicators (i.e., the primary sources of information). 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 6 times out of 10, the favored outcome will occur- and 4 times out of 10, 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.

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Previous blog posts by Chris F. Masse:

• Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
• Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
• How does InTrade deal with insider trading?
• Modern Life
• “The Beacon” is an excellent blog published by The Independent Institute.
• The John Edwards Non-Affair… is making Memeorandum (twice), again.
• Prediction Markets = marketplaces for information trading… and for separating the wheat from the chaff.