Introduction

Prediction markets and market-based forecasting system have conceptual origins dating ghat back centuries, but have gained more adoption in the late 20th century.

Some of the earliest examples and proposals for market-based forecasting systems include:

In 1884, Lillian Evelyn Moller Gilbreth proposed a "futures market" for demand forecasting while working at the company Rand Corporation.
In 1946, Samuel Culbert proposed using market mechanisms to combine and reveal dispersed knowledge relevant to business forecasting.
In the 1950s, economists like Friedrich Hayek discussed the idea of using markets to aggregate information distributed among many individuals.

The first well-documented implementation of an actual prediction market was the Iowa Electronic Markets, launched in 1988 by researchers at the University of Iowa for forecasting election outcomes and other events, but election markets existed well before.

The 1990s saw increased research and experimentation around prediction market designs by economists, led by pioneers like Robin Hanson.

Today prediction markets on the rise, enabled by growth in computing power for smart contracts, oracles and financial tools.

What are prediction markets?

Prediction markets are markets where participants can buy and sell contracts whose payoffs are tied to the outcomes of future events.

Prediction markets are sometimes also known as information markets, event futures, event derivatives, betting markets, idea futures or decision markets.

How do prediction markets work?

They are markets that uses prices as probabilities to make predictions. Here's a simple example: A prediction market could be set up around the question "Will it rain in New York City on July 4th?". Traders would buy shares that pay $1 if it rains, and $0 if it doesn't, or vice versa. If many people think it will rain, the rain shares will be in high demand, driving up their price towards $1. If most think it won't rain, the no-rain shares will trade higher.

What are the types of prediction markets?

There are several models of prediction markets that have been tried, including free money prediction markets, reputation based prediction markets, blockchain prediction markets & zero commission markets.

Are they legal?

The information presented may be out of date. Do your own research before trading, and obviously, this does not constitute financial or investment advice.

Prediction market legality varies depending on where you live and what markets you want to trade.

Globally, exchange volume has been growing in favorable, regulated markets like the United Kingdom, South Korea and Argentina and on decentralized prediction markets. Only five countries have banned prediction markets outright - China, Russia, Iran, Cuba, and Syria.

In the United States, prediction market regulations are inconsistent on elections, commodities, equities and sports. Regulations are strict and vary federally and state by state, where different markets are regulated by different governing bodies.

Election markets are banned in the United States, with an exception given to PredictIt by the CFTC in 2014 that allowed them to take wagers of up to $850 per election market. Eight years later, in August 2022, CFTC rescinded this arrangement. In March 2023, PredictIt successfully challenged this in Fifth Circuit court of appeals. In September 2022 The CFTC banned Kalshi from election markets and in November 2023 Kalshi sued the CFTC.

Binary markets on commodities, bitcoin, forex and equities indices are allowed federally in the US on exchanges like CME, Kalshi, and Nadex.

Sports betting exchanges like Sporttrade, Prophet, SBK and Novig are allowed but only in New Jersey or Colorado.

Largest predictions markets

The largest exchanges are Polymarket, Betfair, Smarkets, and SX.bet where people trade hundreds of millions of dollars monthtly. They offer a wide range of markets on elections, crypto & sports.

What is the wisdom of the crowds?

The wisdom of the crowds refers to the phenomenon that the collective opinion or judgment of a group can often be more accurate than any single individual's opinion. This concept was popularized by James Surowiecki's book The Wisdom of Crowds which was published in 2004.

Prediction markets leverage the collective wisdom of the crowd to arrive at crowd-sourced probability estimates. These markets often prove to be more accurate than individual “expert” opinions, polls, or institutions.

Contribute

Prediction market resources is an open source initiative created by Toni Gemayel. Im a programmer & prediction market enthusiast that believes bets are a tax on bullshit.

Have something to add?
Submit a pull request.

On this page

What are prediction markets? How do they work? Types of prediction markets Are they legal? Largest prediction markets What is the wisdom of the crowds? Contribute