How Prediction Markets Add Value

Prediction markets have rapidly evolved from a niche financial product into a subject of significant regulatory and public interest. As the CFTC continues its review of event contracts, the industry appears to be approaching a pivotal moment. Market participants are increasingly focused on the prospect of regulatory developments that could help shape the future of prediction markets in the United States. Regardless of the specific outcome, the growing attention devoted to these markets reflects their increasing importance within the broader financial ecosystem. The increased scrutiny is not simply a function of market growth, but also of the distinct economic functions these markets perform.

Forecasting Event Probability

Prediction markets have emerged as a powerful tool for forecasting event probabilities by aggregating trading activity into market-implied estimates of future outcomes. The price of each event contract, typically between 1 cent and 99 cents, reflects a collective market assessment of the probability that the referenced event will occur, with higher prices indicating a greater perceived likelihood. Academic studies, such as those by Wolfers and Zitzewitz (2004) and Berg, Nelson, and Rietz (2008), have demonstrated that such markets can serve as useful and efficient indicators of probability, reflecting the consensus view more quickly and accurately than polls or expert opinions.¹⁷

More recently, in February 2026, the Board of Governors of the Federal Reserve’s Finance and Economic Discussion Series released a working paper examining the accuracy of prediction market-implied forecasts of macroeconomic outcomes from a major CFTC-regulated exchange and found that those forecasts were either comparable to or outperformed those of professional forecasters.¹⁸ The paper also showed that these forecasts revealed the full range of possible outcomes and their probabilities, unlike traditional forecasts, which often only provide point estimates or limited scenarios.

Data Aggregation

Knowledge relevant to future events is often distributed across individuals with varying expertise, access and perspectives. Yet conventional sources are rarely able to elicit or consolidate this dispersed information. Prediction markets address this gap by capturing non-traditional and fragmented insights and consolidating them into a single market-based estimate, thereby increasing access to data that conventional sources may overlook.

Traditional news coverage clearly illustrates this constraint. The information that reaches the public is filtered through editorial decisions about framing and shaped by the experts and observers that reporters choose to interview. Even when sources are varied to reflect diverse opinions, they represent only a small fraction of the informed views that exist. Prediction markets impose no such limit. Instead, they elicit information from any individual willing to back their judgment with money. Indeed, major news organizations have recognized these limitations and are increasingly partnering with prediction market platforms to supplement their coverage.

As market participants stand to gain or lose based on the accuracy of their beliefs, this financial incentive may accelerate the transmission of information as prices adjust dynamically to reflect evolving data and sentiment. Indeed, hedge funds and proprietary trading firms have already begun utilizing data from prediction markets to extract actionable data and refine their investment strategies, citing the speed of information transmission as one of the benefits.¹⁹

Price Discovery

Prediction markets can also enhance price discovery by assigning market-based values to expectations about outcomes that have historically lacked transparency, such as the valuation of private companies or assets. Importantly, this does not make confidential information public. Rather, these markets operate on participants’ existing knowledge, assumptions, and signals, transforming them into tradable prices.

What is novel, however, is the ability to price these expectations. In contexts where no formal market previously existed, prediction platforms create a mechanism for expressing and valuing beliefs about future performance. For example, at least one platform has launched a prediction market that allows users to trade on the valuation performance of private companies, effectively generating a market-implied view where none previously existed.²⁰ Increased accessibility to such information can help investors interpret dispersed opinions and may attract a broader spectrum of investors seeking opportunities in private markets that previously targeted mainly institutional and accredited investors.

Hedging of Discrete Event Risks

These markets offer a promising mechanism for hedging discrete event risks that are costly or excluded from traditional insurance coverage. The price discovery process associated with event contracts can provide a more flexible approach for businesses and investors seeking to manage exposure to low-frequency, high-impact events that are difficult to quantify or slow to settle. For example, a company concerned about a specific supply chain disruption can purchase a contract tied to that event. If the disruption occurs, the payout can be used to offset increased costs or lost revenue, effectively acting as a synthetic insurance policy.

Despite these advantages, several challenges hinder broader adoption. One obstacle is the difficulty in securing counterparties willing to take the opposite side of contracts, especially for rare or highly uncertain events. This issue is compounded by market fragmentation, where multiple small or specialized markets operate independently, limiting liquidity and reducing the efficiency of price discovery. Low liquidity can lead to wider bid-ask spreads and increased volatility, undermining both pricing accuracy and the reliability of these instruments as a hedging tool. These challenges highlight the need for thoughtful market design and incentives to attract diverse participants and enhance liquidity. Regulatory developments will likely play a pivotal role in shaping the future landscape of prediction markets.