Don’t prediction markets also serve as a tool for actually valuing a prediction? Without a clear metric to judge the likelihood of a prediction at the time it was made (as is the case with these one-off real world predictions like elections or what a politician will do), I’m liable to consider the guy who predicted the sun will come up tomorrow, and the guy who predicted the market will drop 8% last week as having an equal success rate.
We need something to judge a prediction against, otherwise people would just go for easy predictions that might sound complicated in hindsight, and when they get them right most of the time, tout their “impressive” prediction record. If we can instead say “The market was already predicting this was going to happen with a 95% certainty when you predicted it”, we can know their prediction wasn’t at all unordinary, or valuable. Likewise, if the market predicted something with a lower certainty, say 50%, and our predictor predicted with a 95% certainty, and was right, and this happened consistently, we could consider their predictions as more valuable than chance, with high alpha.
Maybe there’s some political commentator out there who analyzes Trump’s claims and expectations clearly, assigns accurate probabilities better than the market (and bets on them), then we can choose to rely on that commenter in the future as far as predicting Trump’s actions, “beating” the market. We couldn’t find that person without the market in the first place, so even if the market itself doesn’t communicate much information about the underlying probability, it can communicate information about who is better than the market at estimating it.
Don’t prediction markets also serve as a tool for actually valuing a prediction? Without a clear metric to judge the likelihood of a prediction at the time it was made (as is the case with these one-off real world predictions like elections or what a politician will do), I’m liable to consider the guy who predicted the sun will come up tomorrow, and the guy who predicted the market will drop 8% last week as having an equal success rate.
We need something to judge a prediction against, otherwise people would just go for easy predictions that might sound complicated in hindsight, and when they get them right most of the time, tout their “impressive” prediction record. If we can instead say “The market was already predicting this was going to happen with a 95% certainty when you predicted it”, we can know their prediction wasn’t at all unordinary, or valuable. Likewise, if the market predicted something with a lower certainty, say 50%, and our predictor predicted with a 95% certainty, and was right, and this happened consistently, we could consider their predictions as more valuable than chance, with high alpha.
Maybe there’s some political commentator out there who analyzes Trump’s claims and expectations clearly, assigns accurate probabilities better than the market (and bets on them), then we can choose to rely on that commenter in the future as far as predicting Trump’s actions, “beating” the market. We couldn’t find that person without the market in the first place, so even if the market itself doesn’t communicate much information about the underlying probability, it can communicate information about who is better than the market at estimating it.