The theory goes that large groups are smarter than any individual. Meanwhile, an overlapping theory proposes that markets act to aggregate information.
It works like this:
Everyone knows a little something about how much pork bellies should cost. Even if you just buy bacon down at the Piggly Wiggly, you know something. All these people with at least a little knowledge get together in the commodity market, setting bids and asks based on their individual knowledge of the supply and demand...and whammo, the market integrates all the information into a single price. Meanwhile, as new information comes in (farm reports, news flashes about a zombie-like plague affecting pigs in Kentucky, etc.), prices change in reaction to the new data.
A predictive market takes that hive-mind, price-finding concept to non-financial predictions. Want to know who will win the upcoming presidential nomination? How about the next NBA championship? You could read half-cocked opinions on Twitter. You could check betting odds in Vegas. Or you could turn to a predictive market.
On the market, various outcomes will trade like stocks in the financial market. So...you can "buy" shares in "Golden State Warriors win NBA finals"...essentially futures contracts for that particular outcome. People then buy and sell those future bets on a market place. Rising prices for that outcome indicate that market participants think it is becoming more likely. Falling prices suggest chances are becoming more remote.
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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
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