Prediction markets: The wisdom of crowds is reshaping forecasting

Financial markets are fundamentally mechanisms for price discovery, a process by which the competing views of buyers and sellers are aggregated into a market price. While no individual knows with true certainty the value of an asset, the market aggregates competing views into a single observable price through an efficient process that continually incorporates new information and changing expectations of thousands, or even millions, of independent participants. In effect, a market turns a collection of individual opinions into a collective judgment of value.

How do prediction markets work?

The idea behind prediction markets is closely related to the “wisdom of crowds,” popularized by James Surowiecki in his 2004 book The Wisdom of Crowds. One of its best-known examples originated nearly a century earlier, when statistician Francis Galton examined a competition in which 787 people attempted to estimate the weight of an ox. Although individual estimates varied considerably, their collective estimate was 1,197 pounds, just one pound below the ox's actual 1,198-pound weight. The lesson was not that every participant possessed superior information, but that aggregating many different judgments could produce an estimate remarkably close to reality. Prediction markets apply much the same principle to an inherently more difficult question: rather than asking a crowd what something is worth today, can a market aggregate our collective knowledge to estimate the probability of what will happen tomorrow?

Prediction markets allow participants to trade contracts tied to the outcome of a specific future event over a fixed, predetermined period. The event could be the winner of a sporting contest, the outcome of an election, or a financial decision such as the future federal funds rate. Event contracts are financial products whose prices are set by expectations about real-world outcomes. A contract trading at $0.20 implies roughly a 20% probability of that outcome occurring. Unlike a traditional poll, however, participants are not simply expressing an opinion but are taking a financial position on the outcome of the contract.

How fast are prediction markets growing?

The growth of prediction markets has been extraordinary. Combined monthly trading volume on Kalshi and Polymarket increased from just $810 million in July 2024 to nearly $53 billion in July 2026, a roughly 65-fold increase in two years. The expansion accelerated in 2026, with monthly volume rising from $17.5 billion in January to $25.7 billion in May, $47.7 billion in June and $53.0 billion in July, fueled increasingly by sports-related contracts.^1,2

As prediction markets gain wider adoption, an important question remains: how successful are these event contracts at forecasting the future? Recent research published in the Proceedings of the National Academy of Sciences examined approximately one million resolved forecasts across four collective forecasting platforms, 12 subject areas, and time horizons ranging from hours to years. The researchers found that forecasts were generally well calibrated, meaning that events assigned a probability of p% occurred approximately p% of the time. In other words, events collectively given a 70% probability tended to occur about 70% of the time when evaluated across a large number of contracts.³ Prediction markets should not be viewed as crystal balls for individual events. A contract implying a 70% probability can still be wrong three times out of ten and remain perfectly well calibrated. Their value lies not in predicting individual outcomes with certainty, but in aggregating the judgments of market participants into probabilities that, across a large number of events, have been shown to provide meaningful estimates of real-world uncertainty.

Additionally, the research suggests that prediction markets contain meaningful information beyond simple guesswork. Forecasts may outperform basic benchmarks by assigning every event a 50% probability or relying solely on historical occurrence rates. Importantly, useful information was often present relatively early in the forecasting period, and accuracy generally improved as events moved closer to resolution, suggesting that prediction markets can continuously incorporate new information rather than only becoming informative immediately before an outcome is known.

What could prediction markets mean for financial advisors?

While still in their early days, prediction markets have gained considerable traction over the past two years, and recent news suggests that they may soon play a greater role within mainstream financial markets. S&P Dow Jones Indices is partnering with Kalshi to aggregate similar event contracts and create a variety of prediction market indexes. Potential applications include indexes tracking sporting outcomes, weather risks and their impact on harvests, energy demand, geopolitical events, supply chain disruptions, and business revenues.

These new financial markets may provide an additional real-time source of information, translating collective expectations about economic, political, and other events into market-implied probabilities of outcomes. They may also create new forms of diversification and innovative ways to monitor and hedge against real-world risks.

The growth of prediction markets provides a modern test of a centuries-old idea: under the right conditions, the collective judgment of many individuals can be more informative than the opinion of any one participant. Prediction markets will not eliminate uncertainty, but their ability to translate thousands of competing views into observable probabilities may provide another useful source of information for understanding an uncertain future. Ultimately, their value may lie not in telling us what will happen next, but in helping advisors and their clients better understand the odds of what could happen next.

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