It use to be that if you wanted to have your future predicted you would go to a palm reader or a psychic. However, results were often extremely vague, inaccurate, or even fraudulent.
But what if someone really wanted to find a way to predict the future? Well unless you have a working “crystal ball” prediction markets may be the most accurate way for an individual to get some sort of sense of which direction the (business) world is moving towards.
How does a prediction market work?
Intrade.com states that a prediction market:
“allows you to make predictions by buying and selling shares in the outcome of a real-world events. If you want to predict that a certain event will happen then you BUY shares. If you want to predict that the event will not happen then you SELL shares.”
“At the conclusion of an event the market will be settled. If you have predicted correctly then the shares you hold will bring you a profit. If you have predicted incorrectly however you will be hit with a loss.”
“You can sell shares without having to own them first. This known as short selling. When you short sell shares to predict that an event will not happen then you can buy them back again later to close out your prediction. For example, if you short sell 25 contracts you can buy back 25 contracts to close out your prediction and no longer have anything riding on the final outcome of the event.”
“Intrade is a market, so when you predict you are doing so against others also making predictions on the outcome of the same event. If you buy shares then you are making the opposite prediction to the person selling you those shares. Only one of you will be correct - if you are correct then your profits come from the losses of those who predicted incorrectly, and vice versa.”
What types of prediction markets exist?
There are two types of prediction markets that exist today. First, there are the real-world markets where actual money is used in order to bet for or against an event occurring. Second there are the virtual markets where bets are made using virtual money.
Real World Markets
Although legal in other countries, real-world prediction markets are illegal (except for academic purposes, i.e. The University of Iowa Electronic Markets) in the United States of America.
Theoretically, the real-world markets would be the most accurate of the two. The reason being because betting with real money would work at reducing the pool of bets down to people who are more knowledgeable, or have access to more information, regarding certain socioeconomic events
This would essentially eliminate uninformed public opinion from the betting process, thus making predictions more accurate. In other terms, by placing real bets you are forced to “put your money where your mouth is”.
Unlike real-world prediction markets, there are no restrictions on virtual markets because participants are betting with virtual money.
However, since there is no fear of loss, due to the fact that real money is not being spent, there may be the potential that uninformed individuals may make bets that cause the accuracy of such predictions to be diminished.
How can businesses capitalize on prediction markets?
For entrepreneurs looking to create prediction markets there are two positive sources of income that may be derived from prediction markets.
1. For businesspeople residing in countries that allow gambling on prediction markets, there is the possibility for a steady stream of income from individuals placing bets via the internet.
Businesses such as Ireland-based InTrade are already capitalizing on this idea.
2. Regardless of the country that you live, establishing virtual markets can give you a platform on which to create software for use by corporations in their risk management and strategic planning as well as governments for use in diplomatic, military, and economic strategies.
Currently, Inkling provides prediction market solutions for businesses and governments throughout the world.
Also, until the project was shut down a few years ago, the Department of Defense had began building on the idea of using prediction markets for information gathering through the DARPA program.
For more information on prediction markets check out the links below: