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Loading ...“The online prediction market is a forecasting tool where contracts for specific event outcomes (e.g., “Bush wins election�?) are bought and sold and their price reflects the probability that the outcome will take place. Prediction markets have garnered attention for their ability to accurately predict the future, often days and weeks before it arrives.” Via CDMS
“Individuals trading in a market vie to out-predict others. It is this competition that provides useful information that amasses to generate forecasts interpretable through contract prices. Contracts are valued between $0 and $100 dollars, interpretable as a probability. A contract value increases (the event becomes more probable) only with a commensurate decline in value of the other contracts (a decline in their likelihood). Prices fluctuate as traders buy and sell stocks in contracts.”
“There are two ways traders earn money. One, those who buy low and sell high correctly predicted an increase in contract value and thus earn the difference in price. Of course, those who sell low and buy high lose money because their interpretations of the probability of the event were inaccurate. Two, when contracts expire (when the forecasted event has been determined) those holding contracts in the event that took place earn $100 dollars for each stock they own in the contract. Stocks in all other contracts are valued at $0. Thus, those rewarded are considered to have added accurate forecasting information through price adjustment (buying and selling) or through demand adjustment (holding winning contracts).”
Filed under: Prediction Markets
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