Prediction Markets: Distilling Collective Wisdom

However, despite their growing popularity, prediction markets were criticized on several grounds. Others believed that prediction markets were susceptible to manipulation. Also, prediction markets faced some challenges.

Owing to government restrictions, members in these markets had to use virtual currencies, which according to some analysts, limited the accuracy of predictions.

According to them, in order to realize the full potential of prediction markets, members had to be allowed to wager real money, even if only small amounts.

A prediction market is similar to a stock market, in that, just as the stock market is an efficient way of determining the value of a company's stock, the prediction market is an efficient way of forecasting everything from sales of a particular product, to the results of presidential elections.

However, for prediction markets to work well there has to be an efficient system of pooling the information possessed by several people. Therefore, some people preferred to call prediction markets Information Aggregation Mechanisms (IAMs). Predictions made by prediction markets were likely to be accurate if the markets had three essential characteristics -diversity, independence, and decentralization...