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Technology / Data

How Prediction Markets Help Reduce Economic Uncertainty

Like it or not – and most of us don’t – our world is in flux. We live in times of unexpected political swings, economic uncertainty, rapid technological advances and constant social change.

The last few years have typified this state of flux. In the political world, French President Emmanuel Macron scored a decisive electoral victory over Marine Le Pen, the UK voted to exit from the European Union, while Donald Trump was, against pollster’s predictions, elected to the White House. World economies have experienced similar volatility, struggling to rid themselves of the dredges of the 2008 financial crisis, with global debt continuing to grow. In technology industries, progress is being made at breakneck speed, particularly in fields such as artificial intelligence.

Unpredicted shifts across the breadth of society have caused deep divisions, forcing us to adapt to new realities: new governments, new technologies, new economic models, new social norms. While change has always existed, unfortunately, humanity’s reaction is usually negative.

 

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Fear and uncertainty

Many are fearful about globalisation, which causes many people to fear job loss, cultural change and economic stagnation, or social media, which often spreads dubious information and even fake news. Others are apprehensive of our technological destinies, with artificial intelligence and automation having potentially enormous implications on human employment.

Uncertainty makes all good things come to a halt. In times of fear and unrest, businesses don’t hire, consumers don’t spend, investors don’t invest, and innovation slows down. In short, individuals, corporations and entire economies are stifled during times of uncertainty.

There are several components that cause an uncertain society to stop in its tracks. But perhaps the most notable factor is the fear that future cash flows are becoming unstable. When tomorrow looks gloomy, the tendency is to live in austerity today.

 

How prediction markets can help

While it’s not possible to stop the future from changing, prediction markets give us the next best alternative: the ability to predict the ever-changing future.

A prediction market is a group of people investing to speculate on the probabilities of things to come. Accurate predictions reward participants with financial incentives while offering society a stronger element of certainty.

Prediction markets take individuals’ opinions and form these into possibilities, or the chance that something will happen in the future. It’s like any prediction: Brazil has a 17 per cent chance of winning the 2018 World Cup, Democrats have a 58 per cent chance of triumphing at the next US Presidential election, and so on. It’s all based on statistical analysis.

Almost any future occurrence – including sporting events, political elections and swings in the stock market – can be predicted with surprising accuracy using prediction markets. Reducing uncertainty through such predictions can bolster consumer confidence, strengthen commerce and help boost economic health.

 

Trusting in data

While prediction markets aren’t infallible, they’ve shown remarkable accuracy in recent years. One of the best reflections of their accuracy is their uncanny skill in forecasting political elections. In 2008, for example, the prediction market Intrade forecasted that Barack Obama was going to secure 364 votes within the electoral college, and with it the US Presidency. The actual result? He won with 365 electoral-college votes.

In 2012, the same prediction market accurately forecasted the results of the second Obama win with correct predictions in 49 of the 50 states. Would Intrade have predicted the 2016 election of Donald Trump? We’ll never know for sure, as the platform was no longer operating at that point.

The phenomenon of “the wisdom of the crowds” is one reason for the accuracy behind prediction markets. Anyone can join a prediction market, and the large numbers of participants are one of the factors that contribute to successful predictions. Groups of individuals, of course, aren’t always right. In general, groups of people tend to be more insightful than a single expert. This is especially true when complex subject matter and highly uncertain outcomes are involved.

Financial incentives are another factor that contributes to the accuracy of prediction markets. An analogy can be made to stock markets. Just as the stock market rewards investors for choosing stocks correctly, a prediction market financially rewards those who contribute accurate predictions.

The Future of Prediction Markets

Although several prediction markets have come and gone over the past few decades, blockchain technology – ideal for use in predictive markets owing to its inherent decentralisation and security – has infused new life into this valuable model.

Going forward, we can expect increasing numbers of businesses and economists to rely on prediction markets to mitigate the fear of the unknown. Will these tools help to stabilise entire economies and improve the wellbeing of businesses and consumers worldwide? Time will tell, but the future looks bright.
This article is from the CBROnline archive: some formatting and images may not be present.