alt Hacker NewsI think a fundamental problem is that the customer of a prediction market is the trader (gambler?), not the public. If you want accurate forecasts, you need sharp traders. If you want sharp traders, you need to pay them a lot. As a platform, the straightforward way to do that is to attract a large number of uninformed gamblers. And ultimately, the accuracy is not determined by volume, but by the fraction of informed and uninformed capital that is trading for idiosyncratic reasons uncorrelated to the "true" probability. Someone has to put in the effort to make the markets accurate, and that someone has to be paid and that money has to come from somewhere.
> Someone has to put in the effort to make the markets accurate, and that someone has to be paid and that money has to come from somewhere.
The foundational idea of prediction markets is that this payment comes from the market itself. If you have a market full of suckers, the experts with real knowledge are incentivized to participate in the market to profit from the gap between what the market forecasts and their own expert forecast. This in turn will drive the market's prediction to be more accurate by incorporating the expert knowledge in directly form of the their "bets". In effect the market says put up or shut up to everyone who thinks they know better the market.
Viewed like this, prediction markets aren't much different from stock markets that also work by the premise of (active) investors claiming to know better than the market. It all follows from the efficient-market hypothesis.
All this said, I find the trend of prediction markets being used to predict what are effectively mostly random outcomes seems a bit strange. But on the other hand, the mere existence of such markets does provide financial incentive to come up with new, better ways to predict these outcomes. This itself would be very useful, at least as long as the subject is more akin to predicting the weather than the movements of a football.
Ultimately, I'm still an optimist when it comes to prediction markets.