Prediction Market

A prediction market is an exchange where participants trade contracts whose payoff depends on the outcome of future events. The price of a contract reflects the crowd's aggregate estimate of the event's probability.

CLI:sf markets

How Prediction Markets Work

A prediction market lets you buy and sell contracts tied to real-world outcomes. If you buy a "Yes" contract on "Will the Fed cut rates in June?" at 35 cents, you pay $0.35. If the Fed does cut rates, the contract settles at $1.00 and you profit $0.65. If not, the contract settles at $0.00 and you lose your $0.35.

Why Prices Equal Probabilities

A contract trading at 35 cents implies a 35% probability. This works because rational traders won't pay more than a contract's expected value. If you think there's a 50% chance the Fed cuts, a contract at 35 cents is a bargain — you'd expect to make $0.50 on average but only pay $0.35.

Major Prediction Markets

The two largest prediction markets are:

Kalshi — CFTC-regulated, US-based, uses an orderbook model. Contracts on economics, weather, politics, and more. Tickers like KXRECSSNBER-26 for "Will NBER declare a recession by 2026?"
Polymarket — Crypto-based, larger liquidity on political markets. Uses an automated market maker (AMM) model for most markets.

Why They Matter

Academic research consistently shows prediction markets outperform polls, expert panels, and statistical models at forecasting. They aggregate information from diverse sources in real-time, weighted by how much money people are willing to stake on their beliefs.

Example

Contract: "Will GDP growth exceed 3% in Q2 2026?"
Current price: 42 cents (Yes)

If you buy 100 Yes contracts at $0.42 each:
  Cost: $42.00
  If GDP > 3%:  Payout = $100, Profit = +$58
  If GDP <= 3%: Payout = $0,   Loss = -$42

The market implies a 42% probability of GDP exceeding 3%.

Related Terms

Binary Contract

A binary contract is a financial instrument that pays out a fixed amount (typically $1) if a specified condition is met, and nothing otherwise. Prediction markets are built on binary contracts.

Outcome Probability

In a prediction market, the price of a contract directly represents the market's consensus estimate of the probability of that outcome occurring. A contract at $0.72 implies a 72% probability.

Settlement

Settlement is the process by which a prediction market contract is resolved to its final value — either $1.00 (Yes) or $0.00 (No) — once the outcome of the underlying event is determined.

Market Maker

A market maker is a participant who continuously provides both buy (bid) and sell (ask) orders on a prediction market, earning the spread in exchange for providing liquidity to other traders.

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