Prediction Markets: Scaling the Wisdom of the Crowd
What do Allstate, Las Vegas and a presidential election have in common?
The answer is shifting overlaps of risk, forecasting, financial gain or loss, and the biggest wild card of all - human nature.
That’s where Prediction Markets come in. Have you heard of prediction markets?
I’ll be honest, I wasn’t familiar with them until recently. I interviewed a CEO of a prediction platform startup recently, then life got very busy. Some headlines about controversial betting on the presidential election reminded me to revisit the topic.
In a nutshell, Prediction Markets’ value proposition is that, when they work, they monetize the “wisdom of the crowds” because they assume that:
a crowd of people with financial bets on an outcome…
will predict results better…
than experts or even polls.
Author James Surowiecki explored this sort of hive mind concept 20 years ago in his book The Wisdom of Crowds. Fast forward to today. Platform technology now makes it possible for prediction market platforms to efficiently scale the size of the crowd - which in theory, could lead to better forecasting.
‘Kay.
So?
Why do Prediction Markets matter?
Prediction Markets are important to our financial and societal Situational Awareness (SA) because some analysts speculate that they will disrupt or even replace many of today’s largest (!) established markets, including:
Gambling and sports betting
Traditional financial derivatives (!)
Market research and polling
Fantasy sports and esports
Insurance and risk management (!)
Corporate decision-making tools (aka management consulting).
One interesting thing about that list is that the markets seem very different. We don’t usually think of Allstate (insurance) in the same context as Las Vegas (betting on outcomes). What do they have in common?
The answer lies in what makes prediction markets tick.
What are Prediction Markets
At their core, prediction markets involve a whole lotta people speculating on future outcomes using money or goods as stakes.
Because they involve betting on the future, prediction markets are probably as old as human society. They have a fascinating history, with the earliest proof we have traced back to ancient times, long before modern financial systems or formalized markets.
While they weren’t called “prediction markets” then, people speculating on future outcomes using money or goods as stakes created their micro-markets. Examples include ancient Roman chariot races, gladiatorial games, and ancient Chinese and Indian gambling systems.
Wily Roman senators and Chinese financiers would recognize exactly what’s going on today on the Kalshi or Polymarket prediction market platforms.
If you think this just sounds like tech scaling traditional gambling, you're not alone. However, there are some important differences. Read on to learn about them and be the coolest person at the next happy hour.
What is the difference between gambling and prediction markets?
Below is a table summarizing the differences between traditional gambling and prediction markets.
Prediction Markets Today
Fueled by renewed interest (and investment) by VCs, prediction market platforms are trending hot. The other reason they are in the news is because of controversy and run-ins with regulators. We can see prediction market platforms such as Kalshi, Polymarket and PredictIt enabling people to trade on contracts tied to the outcome of future events. Like, elections.
What Is Election Betting in Prediction Markets, and Why Is It Controversial?
As you might guess, election betting is a specific type of prediction market where participants bet on the outcomes of elections, such as who will win a presidential race or control of Congress. These markets aim to reflect public sentiment and aggregate data on election probabilities. Because they aggregate the input from a much wider sample. (more people), they offer insights that traditional polls might miss.
However, election betting is fraught with controversy. Critics argue that it raises ethical concerns, such as the potential to influence voter behavior or create financial incentives to manipulate election outcomes. For instance, some worry that high-stakes trading on elections might lead participants to spread misinformation to sway results. Some of these fears proved to be justified in 2024, as James Broughel points out in an article for Forbes: “The 2024 Election’s Other Big Loser: Prediction Markets”.
He posits that Prediction Market’s performance for the presidential election was undermined by irrational betting and attempts at market making. Ya think?
Broughel says:
This is not to say prediction markets are not useful. They can provide valuable information when properly structured and when participants are trading based on genuine information. However, the 2024 election demonstrated their limitations, particularly in high-stakes political contests where the incentive to manipulate outcomes is strong.
Prediction Markets in 2025
Granted, the US presidential election is not a fair “typical” type of “bet” on a PM platform. There are thousands of other types of bets on Prediction Market platforms.
Do they matter to you?
Yes.
We talk about Situational Awareness a lot on this blog. It's our process for equipping ourselves with the information (as opposed to opinion, hype and noise) we need to Navigate and Lead in a world changing faster than ever.
The current controversy is around using Prediction Markets for betting on election results, but their impact extends beyond elections into almost any sort of forecasting. They intersect with probability and risk, two of the fundamental variables of any market.
As I mentioned up top, some analysts predict (ha) that prediction markets will grow to influence, if not replace, some of our largest markets. They also (for now) provide a low-cost window into the wisdom of the crowds that anyone can observe. As a Web3 advocate, I like the way they decentralize and scale the gathering of expertise.
What do you think?