Prediction markets are everywhere.
They are collective information networks that convert belief into probability. As they spread across society, their outputs will replace opinion and authority.
Information Distribution Systems
At the core, prediction markets are a form of information distribution mechanisms. The internet enables anyone to become an expert in any subject, and prediction markets enable humans to profit off of that knowledge. There are markets for everything; weather, elections, sports, film releases dates. An infinite number of market types exist because anything you can think of inherently has a probabilistic chance of occurring.
The above only works if access to the system is permissionless. Probabilities cannot be accurate if only a select portion of the world can express their belief.
A prediction market built on crypto enables this by removing capital and participation restrictions.
Historical Parallels
Prediction markets aren’t new. For as long as humans have been around, we have speculated on uncertain outcomes.
During the Roman Republic people predicted the outcomes of gladiator games and chariot races. In the early renaissance, predictions were placed on the outcomes of royal successions, papal elections, and wars. Even in the 21st century fantasy football is a form of predicting which players will perform best.
We are living in unprecedented times. For most major events, anyone can view the real-time odds of the outcome. This is the most powerful tool of the 21st century, and those who understand how to use them will rule the world.
Monetizing Knowledge
Markets are payments from the uninformed to the informed. In most markets, the informed are individuals who put in more effort to understand a company than their counterparties. With prediction markets, this is no different except knowledge in any subject can put you into the informed bucket. Anyone can have an edge in anything.
Currently the outcome of every major decision is reflected within the stock market. This enables people who understand the stock market to have an edge over their counterparties (even if they do not have a specific edge on the probability of X occurring).
They can then use this information asymmetry to trade against people trying to predict the probability of X occurring. This is because people who have an edge on X are forced to trade the stock market to reflect this, and therefore expose their trades to external variables. With prediction markets, those same people will be able to trade without influence from other variables.
This idea continues to evolve into every micro-market as people who only have an edge in a certain topic are able to safely express that edge.
Externalities
Publicizing the probability of every single event imaginable has mixed externalities. On one hand, by creating transparency, there will be less manipulation in stock markets from people with asymmetric information. On the other hand, people with the asymmetric information will just display their views on the associated prediction market.
At their core, prediction markets are seeking someone with information to accurately establish the correct probability of an event occurring. So while debatedly immoral, people with asymmetric information are actually establishing the correct probability for a market. Without people who know more than others, these markets would simply be gambling and not reflect the true probability of different events.
I am of the opinion that the net externalities from widespread usage of prediction markets will be positive. There are simply too many positives that stem from highly efficient data.
However, information does not just change markets, but also behavior.
Behavioral Implications
When real-time probabilities for anything are attainable, human psychology changes.
Uncertainty is a large issue in real life. This is negated if you can quantify it.
Let’s use a very simple example: weather.
Right now, weather applications are, at best, somewhat accurate. However, if these applications displayed a prediction market determining the probability of different weather events occurring, it would be a lot more accurate.
If you know with certainty you can trust the weather predictions, fewer mistakes relating to weather take place. You won’t make the mistake of buying Yankees tickets on a day with a 48% chance of lightning occurring. Or maybe you will because sellers are pricing tickets lower, and you’re willing to take the chance of sitting through delays if it means the cost to attend is lower.
There are negatives to this. Let’s use an election as an example.
Candidate A is the strong favorite to win at ~90% probability, with the expected voting 55:45. Voting day comes, and there is a record heat wave.
Assume half of the people supporting Candidate A are monitoring the real-time odds. Then assume that because it’s 105° outside, 1/2 of the people monitoring the election decide to not vote because they assume Candidate A will win in a landslide.
Suddenly, Candidate A has lost 1/4 of their vote, and Candidate B is expected to win 52:48.
The danger is reflexivity. For prediction markets to be accurate, the probabilities they display must not alter the behaviors they’re measuring. If that’s the case, probabilities are actually less accurate.
Governance
If the market is an all-knowing mind, then theoretically it is in the best interest of corporations and governments to use the market for policy making decisions.
This concept is known as futarchy: the idea that policy should be determined by what the market believes will maximize societal outcomes. The same reasons that make markets superior to experts at pricing probabilities also make them superior at forecasting which policies will function best.
The Probabilistic Society
A world run by prediction markets results in every outcome becoming scrutinized and quantified to determine the probability of it occurring.
This creates a probabilistic society where uncertainty is fully phased out.
No action is isolated. Everything is transactional and has infinite downstream effects. Prediction markets won’t just change how we trade, but rather how we think, decide, and govern. Whether this shift elevates or destabilizes civilization is, fittingly, a market waiting to be made.
My odds: 96% that it becomes the greatest era we’ll ever see.