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Random aside: I distinctly remember getting on a phone call with people from the SEC (US Gov't) with the goal of understanding if I could legally start a prediction market. This was during 2020 or 2021. I recall them saying basically "no way" and that it wouldn't be legal, and would be rife with abuse. Fun times.
I dove into the prediction markets rabbit hole a number of years back. And I’ve personally seen witnessed scenarios where the wisdom of crowds seems to really work. What I have not really—including in this piece—read is rigorous theory of what makes it effective or not. There are hints here and in the Wisdom of Crowds book but I’ve never read a really comprehensive theory.
I dove into the prediction markets rabbit hole a number of years back. And I’ve personally seen witnessed scenarios where the wisdom of crowds seems to really work. What I have not really—including in this piece—read is rigorous theory of what makes it effective or not. There are hints here and in the Wisdom of Crowds book but I’ve never read a really comprehensive theory.
Insider trading is a part of it. If someone bets a few billion dollars that America will invade Iran, the probability shoots up to 98%, even though nobody else thinks it will happen. They can then run a press release about how their platform predicted the invasion before anyone else did.
edit: I'm also going back to my bayesian theory days and would be super interested to see a deep dive into whether these markets are rationally updating their beliefs in time. My recollection is super vague here, but I recall something like non-transitive belief loops can lead to dutch-books (so like Johnny Punter things that Trump will win an election against Biden, Biden would win against Ross Perot, and Ross Perot would win against Trump). I'd like to know more about whether these kinds of issues are showing up in these markets?
It sounds like they should be called "indicator markets" rather than "prediction markets", as the data shows they largely just summarize the current knowledge, with little predictive ability.
I tend to go back to this article when I discuss these markets with people https://en.wikipedia.org/wiki/Wisdom_of_the_crowd ... in particular, these markets are designed to tease out the "surprisingly popular" answer https://en.wikipedia.org/wiki/Surprisingly_popular because they incentivize divergence from average response.
>Ive thought hard about how to sell prediction markets to consumers. In 2020, I created Google’s current internal prediction market. Since then, I’ve served as the CTO of Metaculus, a non-market-based crowd-forecasting website, and now run FutureSearch, a startup that provides AI forecasters and researchers.
I feel like openly saying you professionally try to make people believe in markets reduced the impact of any further claim.
>Still, there is a benefit to speed. On March 11, 2026, the Financial Times reported that, upon news of Iran War escalation, the Polymarket odds of inflation at or above 2.8% rose to above 90%. This illustrated an immediate domestic impact to US foreign policy, which could influence the public in a way that updates months later from professional economists might not.
I don't understand the idea that this or similar predictions are of any value? "People strongly believe a war will worsen inflation" is information you could get anywhere and not necessarily based on any high quality decision making.
It sounds like they should be called "indicator markets" rather than "prediction markets", as the data shows they largely just summarize the current knowledge, with little predictive ability.
Most people don't know, that "prediction markets" are acutally based on an idea by DARPA in 2002, after 9/11/2001.