What is a 'Prediction Market'

The prediction market is a collection of people speculating on a variety of events — exchange averages, election results, commodity prices, quarterly sales results or even such things as gross movie receipts. The Iowa Electronic Markets, operated by faculty at the University of Iowa Henry B. Tippie College of Business are among the better-known prediction markets in operation.

BREAKING DOWN 'Prediction Market'

Because they represent a wide variety of thoughts and opinions — much like the markets as a whole — prediction markets have proven to be quite effective as a prognostic tool. As a result of their visionary value, prediction markets (sometimes referred to as virtual markets) have been utilized by a number of large companies — like Google, for example.

The blending of economics, politics, and more recently, cultural factors, has only made the demand for prediction even greater. Add the benefits of data analytics and artificial intelligence; we're living in the golden age of data and statistical utility.

Over the past 50 years, prediction markets have moved from the private domain to the public. 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.

In theory, by pulling information from every available source, estimation methods should improve and become more accurate and consistent. In reality, as we're currently learning, data manipulation brings a host of new ethical and human biases which must be adjusted for. As leaders of all varieties help everyday individuals trust and appreciate prediction markets, their use and effectiveness will only improve further.

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