The idea behind prediction markets is simple: People who claim to have any foresight or expertise into a social or political issue bet on specific empirical predictions concerning what will happen in the future. James Surowiecki's The Wisdom of Crowds has popularized research showing that under certain conditions "crowds" outperform experts. Well-designed prediction markets fulfill those conditions: The Iowa prediction markets outperform exit polls in predicting elections; and Florida orange futures markets outperform weather forecasters in predicting Florida weather. When we give large numbers of people an opportunity to discover the truth about the world, in a situation in which there are financial pay-offs for accuracy, on balance they outperform experts. More recently, Philip Tetlock conducted a large-scale analysis of expert political judgment and discovered that the better known an "expert," the worse his judgment as measured against predictive accuracy.[4]
