I’m not convinced that prediction markets supply data that’s any more accurate than the predictions of individuals. Consider the market in crude oil futures; crude oil is much simpler and therefore much easier to predict than a Friendly intelligence explosion, and yet the data (http://www.durangobill.com/OilChart.html) shows that futures are horrifically inaccurate at predicting future prices. In fact, for most of the past six years, you could have done better at predicting the price of crude oil by using the current price instead of the future-market price. Does anyone have a link to a paper studying how accurate prediction markets are, compared to individual guessing?
In the case of oil, the current price is (sort of) a prediction of the price at a later date. If the market believes that the price of oil will reach a particular level on a particular date, the futures price will reflect that expectation. This sets a floor on the current price, specifically, the price at which it is profitable for a well-financed institution to take out a loan payable on the futures settlement date, buy physical oil now, pay for storage costs, and simultaneously sell the oil for a future date on the futures market.
Note that all prediction markets, especially those where trades are tied to a physical or financial asset that is regularly bought and sold share a similar property: prices are driven by arbitrage opportunities and participants’ hedging needs just as much as by actual predictions.
I’m not convinced that prediction markets supply data that’s any more accurate than the predictions of individuals. Consider the market in crude oil futures; crude oil is much simpler and therefore much easier to predict than a Friendly intelligence explosion, and yet the data (http://www.durangobill.com/OilChart.html) shows that futures are horrifically inaccurate at predicting future prices. In fact, for most of the past six years, you could have done better at predicting the price of crude oil by using the current price instead of the future-market price. Does anyone have a link to a paper studying how accurate prediction markets are, compared to individual guessing?
In the case of oil, the current price is (sort of) a prediction of the price at a later date. If the market believes that the price of oil will reach a particular level on a particular date, the futures price will reflect that expectation. This sets a floor on the current price, specifically, the price at which it is profitable for a well-financed institution to take out a loan payable on the futures settlement date, buy physical oil now, pay for storage costs, and simultaneously sell the oil for a future date on the futures market.
Note that all prediction markets, especially those where trades are tied to a physical or financial asset that is regularly bought and sold share a similar property: prices are driven by arbitrage opportunities and participants’ hedging needs just as much as by actual predictions.