Question

In your OWN words, briefly explain prediction markets and why they work so well? Please explain.

Answer 1

Prediction markets (also known as betting markets, political betting markets, predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are exchange-traded markets created for the purpose of trading the outcome of events.The market prices can indicate what the crowd thinks the probability of the event is. A prediction market contract trades between 0 and 100%. It is a binary option that will expire at the price of 0 or 100%. Prediction markets can be thought of as belonging to the more general concept of crowdsourcing which is specially designed to aggregate information on particular topics of interest. The main purposes of prediction markets are eliciting aggregating beliefs over an unknown future outcome. Traders with different beliefs trade on contracts whose payoffs are related to the unknown future outcome and the market prices of the contracts are considered as the aggregated belief.

At its core Prediction Markets are Futures Markets.

It’s based on a binary event where something either will or won’t happen. In the finance world, participants trade with contracts where the payoff will vary depending on the outcome of a future event. Prediction markets make the result of this future event tradeable.

Essentially it’s placing a bet on the probability of specific results in certain situations, such as elections, sales of a company, price fluctuations of commodities, even changes in the weather.

The value of a bet will in most cases reflect the probability of an outcome materializing.