Predictive Market

  

Categories: Trading

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.

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Finance: What is forecasting?8 Views

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Finance allah shmoop what is forecasting one better than three

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

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that different from the crazed witchy ramblings of a medium

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in a say aunts divine ing your future dating life

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not necessarily on tinder which she and tones will be

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

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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

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units of your product what can you 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

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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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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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