Prediction markets are simply markets that trade in predictions, meaning traders buy and sell contracts on specified outcomes—such as “Hillary Clinton will be elected president of the United States in 2016.” When the election of 2016 is held, that contract is settled. If Clinton loses, the contract pays out nothing. If she wins, it pays out $1. If the contract is currently selling for 40 cents and I think Clinton has a 60% or 70% chance of winning, I should buy.
