Prediction Market

CORE DEFINITION

A prediction market (also known as predictive market, information market, decision market, idea futures, event derivatives, or virtual market) is a speculative market created for the purpose of making predictions. The gains or losses are tied to a specific event (e.g., Will Mr. Ma Ying-jeou win the next presidential election of the Republic of China?) or a parameter (e.g., tomorrow's stock market rise or fall), thereby determining the final monetary/material value. Thus, the current market value of a specific event equals the probability of that event occurring. For example, if people believe the probability of Mr. Ma Ying-jeou winning the next presidential election is 75%, the index value would be $75; if Mr. Ma actually wins, the index value would rise to $100, indicating the event has occurred with 100% certainty. These characteristics of prediction markets distinguish them from gambling, as the house cannot gain an advantage. By buying low and selling high, better market predictors are rewarded; by buying high and selling low, poorer predictors are penalized. Evidence to date suggests that prediction markets' forecasts are no worse than those of professional institutions predicting the same events. Many prediction markets are open to the public. Betfair is the world's largest prediction market, with approximately $2.8 million in trades in 2007.