Why Prediction Markets are Good for Society

What are prediction markets?

Prediction markets can be created for any situation whose outcome is uncertain or contested. Prediction markets are distinct from other common techniques of crowdsourcing predictions, such as digital opinion aggregators or large-scale polls. The outcomes of elections, sporting events, and policy decisions have all been popular topics for prediction markets. Research has consistently shown that prediction markets are more accurate in forecasting the future than expert models or surveys.

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Prediction markets are a source of truth in a post-truth world.

The term “post-truth” gained prominence following the U.S. presidential election in 2016 and is often used as shorthand for the tendency to fashion one’s political opinions and decisions out of a highly personal mix of emotions, rumors, and paranoid superstitions, rather than reason, empirical evidence, or facts. If you were to take a somewhat longer view of U.S. electoral politics, however, you will find many instances in which voters made decisions in spite of available evidence, or out of irrational fear, electric excitement, or even profound disgust, or any of a whole slew of strong emotions stirred up by the publicity-seeking theatrics of aspiring politicians.

Prediction markets help people make more informed decisions.

Businesses, policymakers, and organizations can use the wealth of predictive insights generated by prediction markets to get an accurate view of the world and plan accordingly. Prediction markets can help policy markets predict the outcome of something as complex and multifaceted as The War in Ukraine, or predict the prevalence of extreme weather events, allowing them to allocate resources and personnel before disaster strikes.

Prediction markets help people hedge against negative outcomes.

Another important way that prediction markets can help ordinary people in their everyday lives is by giving people a method for hedging against negative outcomes by reducing their exposure to certain events. For example, let’s say someone has 20% of their net worth in Ethereum. The future price of Ethereum, however, will depend in large part on the timing and success of the “Ethereum merge,” when the network will execute its long-planned shift from a “proof of stake” system to a “proof of work” system, dramatically lowering gas fees. Some people worry that the Ethereum merge won’t happen for many months, or might never happen at all. If the execution of the merge is botched, it’s likely that Ethereum prices will decline significantly. For holders of Ethereum, a good way to hedge against this possible outcome is to trade on Polymarket’s Ethereum merge market. Taking a position that the merge won’t happen for many months is similar to purchasing insurance against a natural disaster: it reduces your exposure to a plunge in Ethereum driven by further delays to the merge.

Prediction markets fact-check the internet.

The internet promotes sensationalism through engagement-seeking algorithms. It can be helpful to remember that any prediction that is broadcast through the internet, whether it be on the “For You” page of TikTok or the digital opinion pages of the New York Times, serves at least two functions. It might be a sincere, good-faith representation of what one individual believes will transpire, but it also seeks to entertain, appear at the top of organic search engine results, hold the viewer’s attention, or incite them to share-all to increase the chances that a viewer will click on banner ads or purchase a monthly subscription.

Prediction markets on Polymarket are accessible to everyone.

For many years, institutional investors have been able to trade complex derivative contracts, essentially options or insurance policies triggered by various event-based outcomes. A derivative might be set to pay out if a particular tranche of loans in a package of mortgages defaults, for example, or an insurance policy tied to particular patterns of fluctuation in currency and commodities markets. This particular maneuver, known as a credit-default swap, isn’t available to ordinary retail traders.

Prediction markets encourage people with the best information to move the market toward their view.

Although the role of experts in public life seems to have diminished tremendously in recent years, the predictions made by trusted media figures, as well as those who occupy positions of institutional authority, continue to be the predictions that carry the most weight. Journalists and government officials might point to their advanced degrees, their years of experience in a related field, carefully calculate their rhetoric and physical presentation, or even their track record of making accurate predictions in the past, in order to establish credibility.

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