Without a lot of preface, I’ll simply ask the question. Do you think that when people put their money on the line that it results in more accurate predictions about upcoming events like elections etc?
What do you mean by the term “prediction market?”
Prediction markets are sort of like futures markets where you can buy and sell based on future outcomes. The questions are always binary in that they have one of two results. Will > Won’t, Yes > No, Can>Cannot etc, etc…
Here is an example I grabbed off the web to explain…
A good example to use is presidential elections.
Futures contracts can be structured to pay $1 if the predicted outcome materializes and $0 if it doesn’t.
If a futures contract, stating that Candidate X will become president trades at 70 cents, that means, according to the market, there’s a 70 percent chance that Candidate X will win the elections.
If Candidate Y’s contract trades at 30 cents, the market puts their chances at 30 percent.
If the contract that you bought supports the eventual outcome, you will get $1 for that contract. If the outcome goes the other way, you get nothing.
As time goes by and more and more people buy the contracts, the prices will fluctuate depending on market conditions and the combined information held by market participants.
You can both buy and sell predictions.
Let’s say you think Trump will win the nomination for the Republican party. If right now I offered to sell you 1000 shares at .75 cents and would pay $1.00 if Trump wins, would you buy? If so, how many?
If on the other hand, if someone else thought that Trump was going to be Impeached and removed by the Senate before the next election, they might be willing to sell X number of shares for less than .75 cents. If they were right they would get to keep each share sold for .75 cents.
If there were a question about Clinton winning the Nomination for the Dems. Seems unlikely, but not impossible, so maybe someone offers X shares at .10 cents. If they are right they win .90 cents on the dollar x number of shares sold, of they are wrong they lose .10 cents x number of shares sold.
For every buyer, there is a seller. The organization that runs the market does not determine the odds, the market does based only on people’s willingness to buy and sell shares at given prices.
The only thing the prediction market, as an organization does, is provide the website and generates the questions. To my knowledge, to operate in the US, prediction markets have to be non-profits.
The idea is that because people are putting their money on the line that they are more likely to be expressing how they really feel.
Hopefully, that’s an adequate explanation. Any questions?
So what do you think, do you think prediction markets are more likely to be an accurate accounting of how people feel about an event, say vs polls where people put nothing on the line?
So why not just call it FUTURES market? BTW, I’ll TAKE that .75 cents/1000 shares that Trump will win in 2020.
Lots of these sites in the UK. Here’s one of them:
If you think he’s a lock, go get some free money…It’s trended up 0.03 cents since last I looked, but hey, .22 cents on the dollar, not bad!
Because, they don’t meet the finantial definition of futures.
why? to the OP.
Why what? I asked:
What are you asking?
I don’t understand the thinking of putting money on predictions. Do you mean like in Las Vegas when they take bets on who wins a match or the presidency?
I think that is exactly what he’s talking about. Currently most of these online sites are in the UK and I wouldn’t put much faith in their grasp of American politics; they live in CNN world; 'nuff said. The Vegas sites I would put more faith in.
Sort of, but not exactly. In Las Vegas there are “Odd Makers” who decide what the line is and other people take the line based on those odds. Prediction markets are different.
There are no odds makers. People can by and sell “shares” at a price.
So for example…
Here we see shares of Dems win the next election selling for 0.57 cents and shares that Republicans win selling for 0.45 cents.
If you think Republicans win, for every share you purchase for 0.45 you will get back $1, so your getting 4.5 to 1 odds.
Whose shares are you buying?
The shares you buy are being offered by other people like you. Obviously if you want to sell a share you’d have to sell it at the same or higher price for someone to buy.
The point is, the markets are set based on the amounts people are willing to spend on a bet. Prices change based on what people are willing to pay and what people are willing to pay are based on how they feel about a particular topic.
Eventually every prediction hits $0 for one side of the answer and $1 for the other.
The question of the OP asks, since people are “voting” with money rather than just opinion, do you think these markets are more accurate than polls that just ask people to answer questions?
… Maybe I’m wrong, but shouldn’t that be more like 2.22 to 1 odds?