March 23, 2026
Prediction markets are way more old than you can think. Back in 1600s, people already
started to bet on the outcome of events, such as who would be the next pope or if a ship would come back after a long voyage.
In the 1900s, a scientist observed something: 800 people between farmers and traders were betting on the weight of bull.
Surprisingly, the average of all the bets was very close to the actual weight of the bull, which was 1200 pounds.
He observed that picking single expert was not as good as averaging the opinions of many people.
Another example:
In 2008, E. Berg and his colleagues wrote a paper confronting the Iowa Electronics Markets and traditional pools for predicting the outcome of the US presidential election.
The market was close to the eventual outcome 74% of the time, while the pools were only correct 50% of the time.
The market significally outperformed the pools in every election since 1988, when forecasting more than 100 days in advance.
Prediction markets should predict complex phenomena accurately for several reasons:
- The market design forces traders to focus on the specific event of interest. This requires doing reaserch, gather and process information across multiple sources and make informed decisions.
- To voice their opinions, traders must open a position in the market, putting money at stake. The more confident they are, the more money they will be willing to risk.
- The market aggregates the diverse information of traders in a dynamic and efficient manner. Traders who perform these tasks well prosper, those who don't may go broke, may drop out of the market and appear less likely to set trades.
How it works
The mechanism is simple :
in a prediction market, you can buy and sell shares of an event.