Predictive Market

The theory goes that large groups are smarter than any individual. Meanwhile, an overlapping theory proposes that markets act to aggregate information.

It works like this:

Everyone knows a little something about how much pork bellies should cost. Even if you just buy bacon down at the Piggly Wiggly, you know something. All these people with at least a little knowledge get together in the commodity market, setting bids and asks based on their individual knowledge of the supply and demand...and whammo, the market integrates all the information into a single price. Meanwhile, as new information comes in (farm reports, news flashes about a zombie-like plague affecting pigs in Kentucky, etc.), prices change in reaction to the new data.

A predictive market takes that hive-mind, price-finding concept to non-financial predictions. Want to know who will win the upcoming presidential nomination? How about the next NBA championship? You could read half-cocked opinions on Twitter. You could check betting odds in Vegas. Or you could turn to a predictive market.

On the market, various outcomes will trade like stocks in the financial market. So...you can "buy" shares in "Golden State Warriors win NBA finals"...essentially futures contracts for that particular outcome. People then buy and sell those future bets on a market place. Rising prices for that outcome indicate that market participants think it is becoming more likely. Falling prices suggest chances are becoming more remote.