Prediction Market

Categories: Trading

The term “prediction market” sounds all fancy and official, but really, it’s just a group of people getting together and speculating about and betting on future events.

Okay, maybe it’s a little more official than that. These aren’t randos who just start talking at a bar one night and end up executing financial trades together. They’re actual, defined groups dedicated solely to making and advising on trades based on event outcomes, and when we say “event outcomes,” we’re talking everything from election results to real estate prices to corn yields in Illinois. They use historical data, crowdsourcing, and predictive analytics to draw their conclusions. Maybe we’ve seen prediction markets go by one of their many other names, such as event derivatives, information markets, or virtual markets, to name a few.

If getting into the whole precision market racket sound like a fun alternative to another D&D game, take heed: gambling is still largely illegal throughout the United States. Yes, there are exceptions, but for the most part, prediction markets aren’t one of them. That’s why the actual prediction market itself will usually use fake money for its trades, or, in a few cases, it’ll get a special permit to operate, which is the case with certain university-sponsored prediction markets like those at Victoria University of Wellington and the University of Iowa.

By and large, prediction markets are used more for speculation than for actual trades. So if, for example, our fave prediction market speculates that the real estate market in Florida is going to go bust next year, we are free to invest and/or make trades accordingly, but the prediction market itself can’t do anything to make it look like they’re sponsoring or advocating illegal gambling.

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Finance: What is forecasting?8 Views

00:00

Finance allah shmoop what is forecasting one better than three

00:08

casting Okay so forecasting in a financial sense isn't all

00:11

that different from the crazed witchy ramblings of a medium

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in a say aunts divine ing your future dating life

00:18

not necessarily on tinder which she and tones will be

00:21

cloudy with a chance of rejection Our company's forecast future

00:25

revenues and profits as driven by sales volumes and usually

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and the pricing of whatever products they're moving out the

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door Why like why bother Well you sell so many

00:35

units of your product what can you do about it

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Well in practice there's plenty you can do about it

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Let's say you won huge discounts and extruded plastic volumes

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for your sneeze guard business The snot thickens any way

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at all that you get in return for ordering five

00:52

years supply Your supplier loved knowing well in advance what

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the demand would be for their extruded plastic so that

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it could negotiate with its unions It's plastic mining contracts

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its natural gas supplier teo melt the plastic and so

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on So in return for a lot of commitment came

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a lot of discounting You've now committed to buy five

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years worth of extruded plastic supplies no matter what Like

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twenty five tons this year thirty tons next thirty five

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the next and so on But after year to the

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economy softens and buffets have decided to cave to the

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germs They aren't just buying enough sneeze guards Toe warrant

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your commitment of thirty five tons of extruded plastic Well

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what can you dio a cry Yes you always do

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that Be wine and blame washington That's a good one

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that always works Or see Spend money on marketing and

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discounting to just quote get through it unquote So yeah

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the answer to see you're on the hook for thirty

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five tons no matter what So rather than have it

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just pile up in the back of a factory you

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lower prices and spend a bit more on marketing And

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instead of only needing a twenty seven tons that the

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existing market would have had you send out the door

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you stimulated demand Five tonnes worth They now have thirty

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two tons needed Teo get sent out for snot guards

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and yes that three tons less And you really wanted

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to sell But it's not terrible You don't go bankrupt

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in three tons of plastic fits right here in the

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back of the factory yard Thing neither Yeah that stuff

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is heavy So through forecasting which letyou know very early

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the softness in the market demand for your sneeze guards

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you were able to stave off what could have been

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a calamitous slow down or even shutdown bankruptcy or whatever

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in production Yeah and that's nothing to sneeze at Gross

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