What Are Prediction Markets?
Prediction markets are trading platforms where you buy and sell shares based on the outcome of future events. The price of a share reflects the market's collective estimate of the probability that an event will occur.
How Prices Represent Probability
When you trade prediction markets, you are essentially buying a contract that pays out based on a real-world outcome.
Question: Will it rain in New York tomorrow?
- Yes shares trade at $0.70
- No shares trade at $0.30
The market believes there is a 70% chance of rain. If it rains, Yes shareholders receive $1 per share. If it stays dry, No shareholders receive $1 per share.
Why Prediction Markets Work
Prediction markets consistently produce accurate forecasts because they combine several powerful mechanisms:
Wisdom of Crowds
Large groups of independent people often make better predictions than individual experts. Markets aggregate thousands of opinions into a single price.
Financial Incentives
Traders have money at stake. This motivates them to research thoroughly and trade on accurate information rather than wishful thinking.
Information Aggregation
People with different knowledge sources all trade in the same market. Prices incorporate information that no single person possesses.
Real-Time Updates
Unlike polls that take days to conduct, prediction market prices update instantly as new information emerges.
Real World Examples
Prediction markets have become significant tools for forecasting major events:
2024 US Presidential Election
Polymarket's "Will Trump win the 2024 election?" market became the most-traded prediction market in history:
| Date | Probability | Event |
|---|---|---|
| October 1, 2024 | 52% | Pre-debate period |
| October 28, 2024 | 66% | Final weeks |
| November 5, 2024 | Resolved Yes | Election day |
Total trading volume exceeded $3.5 billion on Polymarket alone, demonstrating prediction markets' growing mainstream adoption.
Data source: Polymarket
Prediction Markets vs Other Methods
| Method | Speed | Historical Accuracy | Financial Incentives |
|---|---|---|---|
| Prediction Markets | Real-time updates | High (well-calibrated) | Yes (money at stake) |
| Opinion Polls | Days to conduct | Medium (systematic biases) | No |
| Expert Forecasts | Varies | Medium | Reputation only |
| Betting Odds | Real-time | High | Yes |
Research on Accuracy
Academic studies consistently show prediction markets are well-calibrated: when they price an event at 70% probability, it occurs approximately 70% of the time. The Iowa Electronic Markets have outperformed polls in 15 of 16 US presidential elections since 1988. Source: University of Iowa
Brief History
Iowa Electronic Markets (1988)
The University of Iowa launched one of the first modern prediction markets, focusing on US elections. IEM demonstrated that small-scale markets could outperform polls in forecasting election outcomes.
Intrade Era (2001-2013)
Intrade became the dominant prediction market, attracting global attention for its accuracy on elections and other events. It shut down in 2013 after regulatory pressure and financial issues.
Modern Platforms (2020s)
Polymarket (launched 2020) and Kalshi (CFTC-approved 2021) represent the current generation. Polymarket leverages blockchain technology while Kalshi operates as a regulated US exchange.
Common Questions
Frequently Asked Questions
FAQsIt depends on your location. In the United States, Kalshi is fully legal as a CFTC-regulated exchange. Polymarket is not available to US residents. Other countries have varying regulations. Check the Legal section for details on your jurisdiction.
Trading prediction markets involves financial risk. You can lose your entire investment. Prices can move against you quickly, and markets may resolve unexpectedly. Only trade with money you can afford to lose. This site provides educational information, not financial advice.
Next Steps
Now that you understand what prediction markets are, learn how they work mechanically:
How They Work
Understand order books, trading mechanics, settlement, and payouts
Key Concepts
Master essential terminology before you start trading