Prediction Markets -- Everything You Need to Know

In this episode of the Web3 with a16z podcast, Sonal Chokshi hosts Alex Tabarrok and Scott Kominers to discuss prediction markets: what they are, how they work, how to design them, and their relevance in various fields. The discussion covers the history and mechanics of prediction markets, emphasizing their ability to aggregate information and produce accurate forecasts, often better than polls. They explore the economic foundations of markets, potential distortions, and the importance of market thickness and diverse participation. The conversation also delves into the role of crypto and blockchain technologies in enhancing commitment, transparency, and composability in prediction markets, as well as potential applications in areas like scientific research, corporate decision-making, and journalism.

Outlines

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Introduction to Prediction Markets: Definition, Functionality, and Information Aggregation

Accuracy, Hype, and Incentive Design in Prediction Markets

Market Size, Information Gathering, and Statistical Accuracy of Predictions

Wisdom of the Crowds, Price Systems, and the Oil Market as a Prediction Market

Distortions, Manipulation, and the Design of Effective Prediction Markets

The Need for Organic Demand and the Challenges of Creating Prediction Markets

Market Design and Alternative Information Elicitation Mechanisms

Corporate Prediction Markets and the Limits of Forecasting Innovation

Defining Market Thickness and the Public Good Nature of Prediction Markets

Domain Expertise and Information Richness in Prediction Markets

Incentives, Reputation Systems, and the Role of Super Forecasters

Pricing Information and the Limits of Market Comprehensiveness

Herd Behavior, Public Information, and Market Design Implications

Orthogonalization, Futarchy, and New Forms of Government

Efficient Markets, Information Leakage, and the Challenger Disaster

Decentralization, Public Information, and Credible Commitments in Crypto

Decentralization, Transparency, and the Importance of Market Context

Oracles and the Transmission of Off-Chain Information On-Chain

Distorting Oracles, Composability, and Open Source Code

Open Source Code, Decentralized Rails, and the Role of AI

Alternative Information Aggregation Mechanisms

The Surprisingly Popular Mechanism and Auctions as Information Aggregation Tools

Market Design, Incentive Mechanisms, and Payout Feedback Loops

Discrete Events, Continuous Markets, and Conditional Markets

Decision Markets, DAOs, and Internal Currencies

Markets for Private Data and Incentivized Subjective Beliefs

Reinventing News Media and the Bayesian Truth Serum

Gambling vs. Speculation and the Value of Prediction Markets

Prediction Markets -- Everything You Need to Know

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00:04Introduction to Prediction Markets: Definition, Functionality, and Information Aggregation

Introduction to Prediction Markets: Definition, Functionality, and Information Aggregation

04:21Accuracy, Hype, and Incentive Design in Prediction Markets

Accuracy, Hype, and Incentive Design in Prediction Markets

07:04Market Size, Information Gathering, and Statistical Accuracy of Predictions

Market Size, Information Gathering, and Statistical Accuracy of Predictions

11:14Wisdom of the Crowds, Price Systems, and the Oil Market as a Prediction Market

Wisdom of the Crowds, Price Systems, and the Oil Market as a Prediction Market

14:04Distortions, Manipulation, and the Design of Effective Prediction Markets

Distortions, Manipulation, and the Design of Effective Prediction Markets

17:58The Need for Organic Demand and the Challenges of Creating Prediction Markets

The Need for Organic Demand and the Challenges of Creating Prediction Markets

22:14Market Design and Alternative Information Elicitation Mechanisms

Market Design and Alternative Information Elicitation Mechanisms

27:55Corporate Prediction Markets and the Limits of Forecasting Innovation

Corporate Prediction Markets and the Limits of Forecasting Innovation

33:43Defining Market Thickness and the Public Good Nature of Prediction Markets

Defining Market Thickness and the Public Good Nature of Prediction Markets

37:02Domain Expertise and Information Richness in Prediction Markets

Domain Expertise and Information Richness in Prediction Markets

41:11Incentives, Reputation Systems, and the Role of Super Forecasters

Incentives, Reputation Systems, and the Role of Super Forecasters

44:24Pricing Information and the Limits of Market Comprehensiveness

Pricing Information and the Limits of Market Comprehensiveness

47:56Herd Behavior, Public Information, and Market Design Implications

Herd Behavior, Public Information, and Market Design Implications

50:50Orthogonalization, Futarchy, and New Forms of Government

Orthogonalization, Futarchy, and New Forms of Government

53:53Efficient Markets, Information Leakage, and the Challenger Disaster

Efficient Markets, Information Leakage, and the Challenger Disaster

57:12Decentralization, Public Information, and Credible Commitments in Crypto

Decentralization, Public Information, and Credible Commitments in Crypto

1:01:12Decentralization, Transparency, and the Importance of Market Context

Decentralization, Transparency, and the Importance of Market Context

1:05:56Oracles and the Transmission of Off-Chain Information On-Chain

Oracles and the Transmission of Off-Chain Information On-Chain

1:07:33Distorting Oracles, Composability, and Open Source Code

Distorting Oracles, Composability, and Open Source Code

1:10:40Open Source Code, Decentralized Rails, and the Role of AI

Open Source Code, Decentralized Rails, and the Role of AI

1:14:35Alternative Information Aggregation Mechanisms

Alternative Information Aggregation Mechanisms

1:17:41The Surprisingly Popular Mechanism and Auctions as Information Aggregation Tools

The Surprisingly Popular Mechanism and Auctions as Information Aggregation Tools

1:19:51Market Design, Incentive Mechanisms, and Payout Feedback Loops

Market Design, Incentive Mechanisms, and Payout Feedback Loops

1:23:36Discrete Events, Continuous Markets, and Conditional Markets

Discrete Events, Continuous Markets, and Conditional Markets

1:27:27Decision Markets, DAOs, and Internal Currencies

Decision Markets, DAOs, and Internal Currencies

1:30:40Markets for Private Data and Incentivized Subjective Beliefs

Markets for Private Data and Incentivized Subjective Beliefs

1:33:37Reinventing News Media and the Bayesian Truth Serum

Reinventing News Media and the Bayesian Truth Serum

1:37:36Gambling vs. Speculation and the Value of Prediction Markets

Gambling vs. Speculation and the Value of Prediction Markets