Prediction markets are speculative markets created for the purpose of making predictions. Assets are created whose final cash value is tied to a particular event or parameter. The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter. Prediction markets are thus structured as betting exchanges, without any risk for the bookmaker. Robin Hanson was the first to run a corporate prediction market—at Project Xanadu -, and has made several contributions to the field such as: conditional predictions, accuracy issues and market and media manipulation.
People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants.
Predictions markets have been used by organizations such as Google, General Electric, and Microsoft; several online and commercial prediction markets are also in operation. Historically, prediction markets have often been used to predict election outcomes.
Leamer’s 1986 Idea Futures Proposal by Robin Hanson
Should Prediction Markets be Charities? by Peter McCluskey
Prediction Markets As Collective Intelligence by Robin Hanson
Fixing Election Markets by Robin Hanson
Idea Futures (a.k.a. Prediction Markets) by Robin Hanson