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HOW PREDICTIVE ARE PREDICTION MARKETS?

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Forecasting was always crucial. In statistics, research and machine learning can be used for forecasting and thus predicting markets. 

Forecasting literature, such as papers from economists such as Justin Wolfers and Eric Zitzewitz, demonstrated why prediction markets were theoretically optimal information aggregators, as did psychology papers that demonstrated how the markets could fail. 

Every ounce of this acquired knowledge was used in the process of building the exchange to select the order book model, design the fee structure, and craft the trading mechanics—all with the goal of maximising the forecasting power of our markets. 

One of the most intriguing COVID-19 markets is one that has yet to be resolved: VOHC-001. This market inquires whether the Centers for Disease Control and Prevention (CDC) will identify a “variant of high consequence” (VOHC) by March 1, 2022.

Vaccines and therapeutics are ineffective against VOHCs, and no variant has been designated as such. For example, the Delta variant is a “variant of concern,” which is one tier lower. 

Since the market’s inception on September 6, traders have indicated that the likelihood of a VOHC emerging is at least 20%. This is notable because predictions from the news media, politicians, and even scientists have been – and continue to be – far more optimistic about the continued usefulness of vaccines and COVID prevention measures. 

On November 25, there was a spike in the “YES” probability. That was the day South Africa declared the presence of a new, profoundly contagious Omicron variation.

There wasn’t a lot of data about the variation at that point, then again, actually it was immediately named a “variation of worry” by the World Health Organization. Traders drove up yes-side prices by up to 50%. 

In the days that followed, media reports questioned the new virus’s transmissibility and lethality, causing the probability of “YES” to swing rapidly before settling around 40%. As more information about Omicron became available in early December, the probability fell back into the mid-20 percent range. 

The market continues to predict a higher likelihood of a VOHC than is reported in the news or suggested by scientists. Forecasts from prediction markets can be very different and more frequently updated than forecasts from other sources.

Another market series, VAXX, is used to forecast the number of Americans who have been vaccinated. The Centers for Disease Control and Prevention distributes the fundamental information source day to day and updates it with a one-day slack.

The VAXX markets were designed to operate on a weekly basis, and that intends that assuming the market is working appropriately, it will turn out to not entirely set in stone over the long haul as the likely variety in the week by week number is diminished by the stream of day to day items.

Over the lifetimes of the weekly markets, prediction error decreases significantly as the market approaches resolution, implying that the markets responded extremely quickly to new information and updated probabilities without succumbing to narratives or biases common in other sources.

COVID-19 is just one example, but all of Kalshi’s markets operate in the same manner. They are constantly updated, taking new information into account and providing fact-based forecasts.

PREDICTION MARKETS

Augur Forecast Foundation created Augur as a worldwide no-restriction decentralized forecast market stage based on the Ethereum blockchain. Betfair, a London-based internet betting organization, operates the world’s largest online betting exchange and hosts domestic and international political prediction markets.

Kalshi, another governmentally directed forecast market situated in the United States, sent off its beta program in July 2021 with business sectors in view of COVID-19, environment, legislative issues, and mainstream society.

Nadex (North American Derivatives Exchange) is a regulated financial exchange that specialises in binary options and spreads for the short term. It recently launched a suite of prediction markets to forecast economic events. 

Polymarket, a prediction market platform built on the Polygon blockchain, makes trades with USD Coin (USDC), a cryptocurrency stablecoin.

PredictIt, a prediction market based in New Zealand, was launched in 2014 as a research project with a no-action letter from the Commodity Futures Trading Commission. It focuses on markets with political overtones.

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