Prediction markets

Prediction markets (also known as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are exchange-traded markets created for the purpose of trading the outcome of events. The market prices can indicate what the crowd thinks the probability of the event is. A prediction market contract trades between 0 and 100%. It is a binary option that will expire at the price of 0 or 100%.

Research has suggested that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants.

Economic theory for the ideas behind prediction markets can be credited to Friedrich Hayek in his 1945 article "The Use of Knowledge in Society" and Ludwig von Mises in his "Economic Calculation in the Socialist Commonwealth". Modern economists agree that Mises' argument combined with Hayek's elaboration of it, is correct ("Biography of Ludwig Edler von Mises (1881–1973)", The Concise Encyclopedia of Economics). One of the oldest and most famous is the University of Iowa's Iowa Electronic Markets, introduced during the 1988 U.S. presidential election. The , a virtual market game established in 1996 and now a division of Cantor Fitzgerald, LP, in which players buy and sell prediction shares of movies, actors, directors, and film-related options, correctly predicted 32 of 2006's 39 big-category Oscar nominees and 7 out of 8 top category winners. HedgeStreet, designated in 1991 as a market and regulated by the Commodity Futures Trading Commission, enables Internet traders to speculate on economic events.

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