What is a prediction market?

A prediction market is a place where people buy and sell positions on whether something will happen. The price of each answer reads as a probability: if “Yes” is at 70%, the market thinks there’s a 70% chance it happens.

How it works, in four steps

1. A question with a clear answer and a date. “Will the Fed raise rates in December?”, “Who will win the election?”, “Will Nvidia end the year as the world’s largest company?” Every market has rules that say how it resolves and which source it uses.
2. Every answer has a price between 0 and 100%. If an answer happens, each position in it pays the full amount; if it doesn’t, it’s worth zero. That’s why its price works like a probability.
3. The price moves as people buy and sell. When new information comes in (an inflation report, a poll, a speech), people buy or sell, and the price adjusts within minutes.
4. The question resolves. On the date the rules set, using the source the rules name (for example, a central bank’s official statement). Positions in the right answer pay in full; the rest are worth zero.

You don’t have to wait until the end: you can sell your position earlier, at the current price. If you bought “Yes” at 40% and the news pushes it to 60%, you can sell there.

Why do their prices mean anything?

A market price pulls together what many different people know, and each of them loses money if they’re wrong. Anyone who thinks a price is off has a reason to correct it: if “Yes” is at 30% and you think the real probability is 50%, it makes sense for you to buy, and when you do, the price goes up.

The idea isn’t new. Since 1988, the University of Iowa has used this mechanism for US elections, and several studies found its prices were as accurate as the polls, or more. Today there are markets with millions of dollars in volume on interest rates, inflation, elections and companies.

Markets, polls and analysts are not the same thing

• A poll asks what people think, or who they’d vote for, today. A market asks what will happen, and whoever answers pays for their answer.
• An analyst gives the view of one person or one team, every so often. A market adds up many views and updates by the minute.
• A market can be wrong too, especially when volume is low or the question is hard to resolve.

What kinds of questions there are

Economy (Fed and Banxico decisions, inflation, growth), politics (elections in Mexico and around the world), geopolitics, companies and tech (quarterly earnings, artificial intelligence), crypto, culture and awards, and sports too. The best questions have an answer anyone can check without argument.

Their limits

• Probability isn’t certainty. Something at 80% doesn’t happen one time in five.
• Low volume, less reliable price. In a small market, a single purchase moves the price a lot.
• The details of the rules matter. The closing date and the source can change the answer.
• You can lose what you paid. If your answer doesn’t happen, your position is worth zero.

How you see them in Bomba

Bomba brings the world’s largest prediction markets into one iPhone app built for Mexico: live probabilities, charts, volume and each market’s rules one tap away, by category. You deposit with SPEI from your bank, with Apple Pay or with crypto. To learn how to read each number, continue with Price = probability.