Earlier quoted context omitted.
How? Then why would non-insiders bet? The classic prediction market is guessing the weight of an elephant (or some animal) at a circus. The average guess of the crowd will actually get very close. But if someone knows the actual weight, no one would play.
The entire idea of a prediction market is to aggregate insider information. If you don't have insiders, you're not doing predictions, you're just doing gambling. Granted: that's what almost every Polymarket user is actually doing. But that's a bad thing . The insider whales are the only ones actually using it for its intended purpose.
Like, prediction markets have questions ranging from what the weather will be in a certain year, to who will win elections, to what stock prices or exchange rates will be, to whether companies will announce specific products, to whether particular people will start dating, to whether a specific person will say a specific word during a conference (some of the Manifold "prop bets" for Manifest).
These are not the same kinds of questions in terms of whether there are insiders at all or who the insiders are. Maybe we can't expect prediction markets to have the same dynamics in all of these cases.
Depending on what you want out of a prediction market, there's probably a sweet spot in terms of whom you should expect (or want) to be trading in it.
In the most exogenous events, those that are most outside of the control of individuals or groups, I think Robin Hanson hoped (in proposing "idea futures") that people would be incentivized to invest in research in order to gain a statistical edge in the market, but also assumed that there wasn't anyone who was inherently drastically better positioned to get information about the question than anyone else. E.g. "I will spend $X to get a better estimate of this probability (hopefully by otherwise ethical means?), and that will make my expected return from buying $Y worth of prediction contracts greater than $(X+Y)". Indeed not something retail investors or gamblers should probably participate in.
It's also true that in some cases where there are true insiders it can give the insiders a financial incentive to reveal confidential information. From the point of view of trying to get the most accurate possible estimate of the likelihood of future events, that would indeed also be a success, even if the process was "unfair" to non-insiders.