Prediction Market
Categories: Trading
The term “prediction market” sounds all fancy and official, but really, it’s just a group of people getting together and speculating about and betting on future events.
Okay, maybe it’s a little more official than that. These aren’t randos who just start talking at a bar one night and end up executing financial trades together. They’re actual, defined groups dedicated solely to making and advising on trades based on event outcomes, and when we say “event outcomes,” we’re talking everything from election results to real estate prices to corn yields in Illinois. They use historical data, crowdsourcing, and predictive analytics to draw their conclusions. Maybe we’ve seen prediction markets go by one of their many other names, such as event derivatives, information markets, or virtual markets, to name a few.
If getting into the whole precision market racket sound like a fun alternative to another D&D game, take heed: gambling is still largely illegal throughout the United States. Yes, there are exceptions, but for the most part, prediction markets aren’t one of them. That’s why the actual prediction market itself will usually use fake money for its trades, or, in a few cases, it’ll get a special permit to operate, which is the case with certain university-sponsored prediction markets like those at Victoria University of Wellington and the University of Iowa.
By and large, prediction markets are used more for speculation than for actual trades. So if, for example, our fave prediction market speculates that the real estate market in Florida is going to go bust next year, we are free to invest and/or make trades accordingly, but the prediction market itself can’t do anything to make it look like they’re sponsoring or advocating illegal gambling.
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Finance: What is forecasting?8 Views
Finance allah shmoop what is forecasting one better than three
casting Okay so forecasting in a financial sense isn't all
that different from the crazed witchy ramblings of a medium
in a say aunts divine ing your future dating life
not necessarily on tinder which she and tones will be
cloudy with a chance of rejection Our company's forecast future
revenues and profits as driven by sales volumes and usually
and the pricing of whatever products they're moving out the
door Why like why bother Well you sell so many
units of your product what can you do about it
Well in practice there's plenty you can do about it
Let's say you won huge discounts and extruded plastic volumes
for your sneeze guard business The snot thickens any way
at all that you get in return for ordering five
years supply Your supplier loved knowing well in advance what
the demand would be for their extruded plastic so that
it could negotiate with its unions It's plastic mining contracts
its natural gas supplier teo melt the plastic and so
on So in return for a lot of commitment came
a lot of discounting You've now committed to buy five
years worth of extruded plastic supplies no matter what Like
twenty five tons this year thirty tons next thirty five
the next and so on But after year to the
economy softens and buffets have decided to cave to the
germs They aren't just buying enough sneeze guards Toe warrant
your commitment of thirty five tons of extruded plastic Well
what can you dio a cry Yes you always do
that Be wine and blame washington That's a good one
that always works Or see Spend money on marketing and
discounting to just quote get through it unquote So yeah
the answer to see you're on the hook for thirty
five tons no matter what So rather than have it
just pile up in the back of a factory you
lower prices and spend a bit more on marketing And
instead of only needing a twenty seven tons that the
existing market would have had you send out the door
you stimulated demand Five tonnes worth They now have thirty
two tons needed Teo get sent out for snot guards
and yes that three tons less And you really wanted
to sell But it's not terrible You don't go bankrupt
in three tons of plastic fits right here in the
back of the factory yard Thing neither Yeah that stuff
is heavy So through forecasting which letyou know very early
the softness in the market demand for your sneeze guards
you were able to stave off what could have been
a calamitous slow down or even shutdown bankruptcy or whatever
in production Yeah and that's nothing to sneeze at Gross