Prediction Market

What Is A Prediction Market?

A prediction market is an exchange-traded market where people place bets on the outcome of future events.

Deeper Definition

Prediction markets are otherwise known as “betting markets.” They are platforms that allow people to trade on contracts dependent on the occurrence of events in the future. Events range from the outcome of an election, future commodity prices, quarterly revenue results of a company, etc. 

Prediction markets are like futures markets but with more offerings. In futures markets, traders go long or short on the price of a contract depending on what they expect the future price of a commodity or financial asset will be. Prediction markets offer the same thing but are not limited to commodities and other financial assets alone. They include predicting the winner of an election, how much gross movie sales would be, etc.

Market prices in prediction markets can help indicate people’s belief that a particular event will occur in the future. Typically, a higher price signals that a person or group of persons believes the probability of the outcome of the bet is more likely. On the other hand, a lower price signals a belief of low probability that an event takes place.

Some prediction markets allow people to place bets using real money, while others support virtual money. That means that prediction markets may serve as a means of generating income. It could also serve as a crowdsourcing tool created explicitly to aggregate people’s beliefs over an unknown outcome.

Prediction Market Example 

The Iowa Electronic Markets (IEM) is a real-money prediction market operated by the University of Iowa Tippie College of Business. It allows traders to buy and sell contracts based on election results, economic indicators, among other things. The IEM enables speculators to place bets using real money. A speculator may risk between $5 and $500 on the outcome of events.

Though prediction markets allow people to place bets on the outcome of future events, they may serve as a crowdsourcing tool for gathering people’s opinions. For instance, companies such as Google, Hewlett-Packard, and Microsoft use internal prediction markets to ask their employees whether some new products are likely to succeed.