Prediction markets: Difference between revisions
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Created page with "Prediction markets buy and sell contracts that pay off (typically $1) if the pre-determined event happens. 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. PredictIt Polymarket" |
Added comparisons to prediction aggregators like Metaculus and added more examples of prediction markets. |
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Prediction markets buy and sell contracts that pay |
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. |
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=== Interpretation of prices as probabilities === |
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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. |
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. |
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=== Comparison to prediction aggregators === |
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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, |
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* only encourage trading and thus changing the (market implied) probability for users who disagree with the market consensus, |
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* allow users to express higher order beliefs, i.e. how confident they are in the market being wrong, by betting varying amounts of money, |
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* 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. |
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** 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'. |
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=== Examples === |
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==== Real-money prediction markets ==== |
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* Augur |
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* Insight Prediction |
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* Kalshi |
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==== Play-money prediction markets ==== |
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* Manifold Markets |