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Prediction markets are markets where users can buy and sell contracts that pay out (typically $1) if the pre-determined event happens and nothing otherwise.
Interpretation of prices as probabilities
Under certain conditions, the equilibrium price of a contract can be understood at the consensus probability about the event happening, namely if the no-arbitrage principle applies.
Comparison to prediction aggregators
For a more complete comparison, see Comparison of prediction platforms and prediction markets.
Prediction aggregators usually encourage everyone to submit their best guess by making it more likely to earn reputation points than lose them. Ideal prediction markets (no withdrawal/trading fees, high liquidity), in contrast,
- only encourage trading and thus changing the (market implied) probability for users who disagree with the market consensus,
- allow users to express higher order beliefs, i.e. how confident they are in the market being wrong, by betting varying amounts of money,
- are more consistent, e.g. for two questions A, B where A implies B, the price (and hence the market implied probability) of B must be higher than that of A due to arbitrage.
- In the same example, prediction aggregators could assign a higher probability to A than to B, even if all users are perfectly rational, if different subsets of users predict on A and on B; in particular a few users noting the inconsistency cannot change it unless their predictions are weighed disproportionately to the other users'.
Real-money prediction markets
Play-money prediction markets
- Manifold Markets