A prediction market is a place where you can buy and sell contracts that pay $1 if a specific event happens, and $0 if it doesn't. The price of that contract , at any given moment , is the market's best estimate of how likely the event is to happen.
That's it. Everything else is detail.
A concrete example
Say Kalshi lists a contract titled "Will the Fed cut rates at the May meeting?" that's currently trading at 28¢ for YES. That means:
- Someone buying a YES contract pays 28¢. If the Fed cuts, they get $1 back (72¢ profit on 28¢ risked). If not, they get $0 (lose 28¢).
- Someone buying NO contract pays 72¢. If the Fed doesn't cut, they get $1 (28¢ profit). If the Fed cuts, they get $0 (lose 72¢).
- The market is collectively pricing the event at roughly 28% probability.
Where does the price come from?
Every contract has an order book, just like a stock. Traders post bids (I'll pay up to X for YES) and asks (I'll sell YES for Y). When bids and asks match, trades execute. The "last price" is the most recent trade; the "midpoint" is the midpoint between best bid and best ask.
The price moves because information moves. If CPI prints hot, the Fed-cut market ticks down. If a candidate wins a primary, their 'nominee' market ticks up. The collective response to new information is what makes prediction markets an interesting data source , they're a real-time probability estimate built from actual dollar flow.
Prediction markets vs. sports betting
These are legally and structurally different:
- Prediction markets (Kalshi, Polymarket) trade contracts that settle at $1 or $0. You're buying a contract that derives its value from an event outcome. Regulated by the CFTC in the US (Kalshi) or unregulated offshore (Polymarket).
- Sports betting (DraftKings, FanDuel) offers fixed odds on specific outcomes. The bookmaker sets the odds; you either take or leave them. Regulated state-by-state.
The practical difference: prediction markets have transparent price discovery (the price IS the probability) and let you both buy and sell. Sports betting offers take-it-or-leave-it odds with a bookmaker's vig built in.
Are they accurate?
Academic research (Wolfers & Zitzewitz 2004, Arrow et al. 2008) consistently finds prediction markets beat expert forecasts for many kinds of events , elections, economic releases, weather , when liquidity is sufficient. The "wisdom of crowds" effect is real when the crowd has skin in the game.
But they have known biases. Longshot markets (under ~10¢) are slightly overpriced relative to true frequency , the "favorite-longshot bias." Thinly-traded markets can be moved by single large traders. And very short-dated markets can be inefficient as new information hits.
How to read a market page
On any market page on this site, you'll see:
- YES price: the probability the market is assigning
- Volume: total dollars traded over the market's life (a credibility signal)
- Open interest: dollars in positions currently held (deeper = tighter spreads)
- Price history: how the implied probability has moved
- Resolution rules: the exact condition for YES