Prediction markets can complement traditional polling by aggregating dispersed expectations and incorporating new information, but their reliability depends on a range of factors. In a new insight, Director of Financial Services Policy Thomas Kingsley discusses the strengths and weaknesses of prediction markets and how they differ from traditional polls.

He concludes:

Only 25 percent of Americans trust political polling. Similarly, prediction markets can improve election forecasting, but they are not oracles, and the lessons of 2016, 2024, and the Vatican converge: National totals are not state outcomes, thin markets can sound more certain than the evidence warrants, and no price can reflect what its traders cannot know. The evidence on calibration is nonetheless encouraging, since markets have so far been reasonably candid about how often they are likely to be wrong. The harder question is whether they tell analysts anything that polling has not already said, and answering it requires comparable forecast records together with a regulatory framework that polices the trading without foreclosing the evidence. The CFTC’s proposed rule and enforcement actions speak to the second requirement but not the first. Until the data accumulate, claims that markets have made pollsters obsolete remain premature; markets have earned a seat at the table, but not yet the head of it.

Read the analysis.