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Prediction Market

A prediction market is an exchange where participants buy and sell contracts tied to the outcomes of future real-world events, with prices reflecting the crowd's collective probability estimate. Unlike traditional financial markets, the underlying asset is an event outcome rather than a company or commodity.

Updated June 25, 2026Market Fundamentals
TL;DR
Prediction markets let you trade on whether real-world events will happen, turning crowd sentiment into probability prices.

Key Points

✓Contracts pay a fixed amount (usually $1) if an event resolves correctly and $0 if it does not.
✓The current contract price, expressed in cents, directly represents the market's probability estimate for that outcome.
✓Regulated U.S. platforms such as Kalshi operate under CFTC oversight as designated contract markets.
✓Prediction markets aggregate dispersed private information, often producing forecasts more accurate than polls or expert panels.
✓Markets cover a wide range of events including elections, economic data releases, sports outcomes, and climate metrics.

How Prediction Markets Work

A prediction market creates a tradable Event Contract for every question it lists. Participants buy Yes/No Shares representing their belief about a future outcome. Because each contract pays $1.00 at Settlement if correct and $0.00 if wrong, the Contract Price at any moment encodes the market's collective probability estimate. For example, a YES contract priced at $0.68 implies the crowd assigns a 68% chance to that outcome. Buyers and sellers interact through an Order Book, and prices shift continuously as new information arrives. Platforms like Kalshi are regulated under the CFTC framework, while decentralized venues like Polymarket operate on blockchain rails. Revenue typically comes from Trading Fees rather than from taking positions against traders, keeping the exchange neutral.

Information Aggregation and Forecasting Value

The defining feature of prediction markets is Information Aggregation: the mechanism by which prices synthesize private knowledge held by thousands of participants into a single public probability. Traders who hold superior information profit by trading against mispriced contracts, pushing prices toward accurate estimates. Research consistently shows that well-funded prediction markets outperform opinion polls and even structured expert forecasts across political, economic, and scientific domains. The process also enables real-time updating, since Contract Price responds instantly to breaking news. The three main market structures are Binary Market (yes or no), Scalar Market (numeric range), and Categorical Market (multiple discrete outcomes), each suited to different types of questions. Together they give forecasters and hedgers a precise, incentivized tool for reasoning about uncertainty.

Related Terms

Event Contract
An event contract is a financial derivative whose value is determined by the outcome of a specified real-world event, paying a fixed amount if the defined outcome occurs and nothing if it does not. Event contracts are the core tradable instrument on prediction market platforms.
Binary Market
A binary market is a prediction market in which exactly two mutually exclusive outcomes are possible, typically labeled YES and NO, with one contract paying $1.00 and the other paying $0.00 at resolution. It is the most common market structure on platforms like Kalshi and Polymarket.
Price as Probability
Price as probability is the core interpretive principle of prediction markets: because a winning contract always pays exactly $1.00, the current market price of a contract (expressed in dollars) equals the crowd's collective probability estimate for that outcome occurring.
Information Aggregation
Information aggregation is the process by which prediction market prices synthesize dispersed private knowledge held by many participants into a single, publicly observable probability estimate. The financial incentive to profit from superior information causes traders to reveal their beliefs through trades, making prices increasingly accurate over time.
Kalshi
Kalshi is a US-based prediction market exchange regulated by the CFTC as a Designated Contract Market, allowing traders to buy and sell event contracts on real-world outcomes. It was the first exchange to receive CFTC approval specifically for event contracts, launching its first markets in 2021.

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