Can prediction markets become a public good—or a public hazard?

The promise and peril of crowd forecasts

Crowds can be erratic, emotional and easily misled, yet they can also produce remarkably accurate judgments when their views are properly aggregated. In his 2004 book, The Wisdom of Crowds, former New Yorker staff writer James Surowiecki highlighted a 1906 county fair where visitors were asked to guess the weight of an ox.

Roughly 800 estimates averaged 1,197 pounds, just one pound short of the actual weight. While many individuals were likely far from the mark, the collective estimate was strikingly accurate. Similar logic helps explain why financial markets are so difficult to outperform: when people risk real money, they have stronger incentives to seek information, assess risk and make informed decisions.

Prediction markets aim to apply that principle to future events, from elections and natural disasters to geopolitical crises. These platforms allow users to buy and sell contracts tied to specific outcomes, such as whether the US will announce the end of the Iranian blockade of the Strait of Hormuz by 31 December, or whether Paris will record a temperature above 40°C on a given day.

The number of prediction markets is growing. Supporters argue that, like a crowd estimating the weight of an animal, trading on event-based contracts can reveal useful probabilities. A contract priced at $0.65 is generally interpreted as implying a 65% chance that the outcome will occur. Shayne Coplan, founder of the cryptocurrency-based platform Polymarket, has described prediction markets as a “global truth machine” that could help guide public policy.

These markets make it possible to wager on an expanding range of events, including sports, wildfires and wars. Yet the ability to bet on outcomes that participants may influence creates serious risks. Bad actors could, in theory, profit from starting fires, escalating conflicts or interfering in elections. In response, US officials are revising polling employee oaths to protect the integrity of the first full election cycle conducted amid widely accessible prediction markets.

The life insurance industry learned long ago to avoid contracts where buyers have an incentive for the insured event to occur, a principle known as insurable interest. That is why people cannot simply buy policies on strangers or enemies. Prediction markets, however, remain in a less settled phase, bolstered by influential backers and moving quickly into mainstream use. Their early impact has been both entertaining and alarming.

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