Prediction Markets

Briefly describe the prediction market

Prediction markets are speculative markets created for the purpose of making predictions. In a prediction market assets are created whose final cash value is tied to a particular event such as the Democratic or Republican nominee for president or a particular parameter such as a company’s total sales for the next quarter. Then the current market prices are interpreted as predictions of the probability of the event or the expected value of the parameter. Predication markets are also known as information markets and decision markets. They are used specifically to forecast events

The pros and cons of using prediction market compared to the traditional group meeting

Prediction markets have many advantages over a traditional group meeting. First, in a traditional group meeting people tend to think alike whereas in prediction markets there tends to be much more diversity of opinion which makes them better for coming up with innovative ideas. The second advantage that prediction markets have over a traditional is that there is less risk of “group think.” One final advantage of prediction markets is that they in general come up with a more reliable opinion because with such a large number of people, extreme opinions become insignificant.

One advantage that a traditional group meeting has over a prediction market is that in a traditional group you have a group of individuals who think alike; there is not less diversity of opinion. This makes a traditional group meeting preferable to a prediction market in a crisis situation when making a decision quickly is important. Another advantage that a traditional group meeting has over a prediction market is that the people who are part of a traditional group meeting have more knowledge on the topics in question then most people in a prediction market do.

How the prediction produced by the market reflects “the wisdom of crowds”?

The prediction that is produced by a prediction market is diverse and unbiased because it is developed from the wisdom of a crowd. It represents the cumulative value of many people’s opinions and this makes it much more reliable.