Prediction markets are actually coordination tools that force specific outcomes to happen rather than just forecasting them.
The price of a bet on a future event acts as a focal point that changes the behavior of the people involved. Most experts judge a prediction market based on how accurately it guesses the final result of an election or a product launch. This study shows that the market is reflexive, meaning it creates the very reality it claims to be observing. When a market shows a high probability of success, it encourages the exact actions that lead to that success. This turns forecasting into a political act that can be used to manipulate real-world events.
Price as Focal Point: Prediction Markets, Conditional Reflexivity, and the Politics of Common Knowledge
SSRN · 6657119
Prediction markets are widely treated as forecasting devices that reveal collective expectations about uncertain futures. This article argues that under specifiable conditions they also function as coordination mechanisms: public probabilities that organize the behavior of voters, donors, journalists, traders, and institutions in ways that can be self-fulfilling or self-defeating. Most existing work asks whether prediction markets forecast accurately; this paper asks whether accurate forecasting