Prediction markets allow people to predict the probability of events and make money on accurate predictions. Examples include Intrade, Betfair, and Hollywood Stock Exchange. They use collective betting to reward accurate predictions and punish inaccurate ones. Some use imaginary money, but studies show they can still be successful. Prediction markets date back to the 1940s and were used to bet on political campaigns. There is controversy over their effectiveness and ethics, but they may need to provide better demonstrations of their predictive power to gain wider acceptance.
Prediction markets are a system for predicting the probability of various events and making money on accurate predictions. About a dozen exist and are open to the public, including Popular Science Predictions Exchange, TradeSports, Iowa Electronic Markets, NewsFutures, Bet2Give, Hollywood Stock Exchange, The simExchange, Intrade, and Betfair. They generally focus on a general domain of forecasting, such as politics, movies and movies, technology, and futurism. Other names for prediction markets include decision markets, information markets, idea futures, event derivatives, and virtual markets.
The basic idea of a prediction market is that the most accurate predictions will emerge from the betting activity of the collective, which rewards accurate predictions through winnings and punishes inaccurate predictions through losses. However, many prediction markets use imaginary money rather than real money. However, evidence shows that prediction markets using play money can be successful in making accurate predictions. One study compared NFL predictions for a full season using a fictional money-based prediction market and a real-money prediction market, and found that the latter is no more predictive than the former.
Prediction markets have a significant history, dating back to at least the 1940s, when people placed bets on which politicians would win a given campaign. However, it wasn’t until 1990 when the first enterprise prediction market was created, by Robin Hanson at the Project Xanadu software company. This prediction market was used to bet on the scientific controversies of the time, such as whether or not cold fusion was feasible. This was followed by other prediction marketplaces in the late 1990s and early 2000s as Internet use became widespread and the idea of a prediction marketplace became more widely known.
Today there is controversy over the effectiveness of prediction markets, or even whether they are ethical or not. For example, Robin Hanson, mentioned earlier, tried to create a forecasting market, using public funds, shortly after 9/11 to judge the likelihood of terrorist attacks. This idea was quickly rejected by people who considered the whole idea unethical. Academics have published papers saying that prediction markets are only useful when the probability of the event is close to 11 or 1. For prediction markets to demonstrate their real-world effectiveness to a wider audience, they will need to provide better demonstrations of their predictive ability. power.
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