A prediction market is a market where people can trade contracts that pay based on the outcomes of unknown future events. The market prices generated from these contracts can be understood as a kind of collective prediction among market participants. These prices are based on the individual expectations and willingness of investors to put their money on the line for those expectations.

• Prediction markets are markets where contracts that are contingent on the occurrence of events in the future can be traded.
• These contracts are similar to bets on uncertain events, and prediction markets are also known as betting markets.
• They are used to bet on a variety of instances and circumstances, from the outcome of presidential elections to the results of a sporting event.
• Prediction markets depend on scale; the more individuals participate in the market, the more data there is, and the more effective they become.

Understanding a Prediction Market

Prediction markets are similar to futures markets for commodities or other financial asset prices. In futures markets, traders bid up or down the price of a future contract based on their expectation of what the future price of the underlying asset will be. Prediction markets are just futures markets where the future event being traded upon is something other than the price of an asset at some point in the future. Prediction markets involve a collection of people speculating on a variety of events through the type and structure of the market itself.