Prediction markets, and what the odds actually mean
The price is a probability, not a prophecy. A 70% chance means the other thing happens three times in ten.
Read a prediction market without misunderstanding what it is telling you.
How Prediction markets works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Volatile is not the same as risky
The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.
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The price is the probability
A contract pays £1 if an event happens and nothing if it does not. If it trades at 70p, the market is saying there is roughly a 70% chance. That is a genuinely elegant mechanism: people betting real money tend to be more honest than people answering surveys.
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Which means it is not a forecast, and being wrong is not a failure
If the market said 70% and the other thing happened, the market was not necessarily wrong. Things with a 30% chance happen roughly 30% of the time. That is what 30% means.
People routinely declare prediction markets discredited on the basis of a single outcome, which is a misunderstanding of probability rather than a criticism of the market.
The way to judge them is calibration across hundreds of events: of everything priced at 70%, did roughly 70% happen? Not whether they called one election.
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Thin markets are noise
A market with real money and many participants aggregates information well. A market with three traders and no volume aggregates nothing, and can be moved by anyone with a modest bankroll. Check the liquidity before you treat the number as a signal.
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The useful investing application is hedging, not gambling
The interesting use is not betting. It is asking what the market implies, and noticing when your portfolio has an enormous unhedged bet on something the market thinks is a coin flip.
You can explain why a 30% outcome happening is not evidence the market was wrong.
Read next
The price is a probability, not a prophecy. A 70% chance means the other thing happens three times in ten.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.