Prediction Markets - What Are They and Are They a Threat to the US Gambling Industry’s Household Names?

The internet has been responsible for the spawning of innumerable industries and, for the death of others. After taking gambling to the next level with increased accessibility and market penetration, could the internet be about to herald the demise of household gambling names that it helped to create?

Read on to find out…

Prediction Markets – What Are They?

Head over to that old faithful Wikipedia and you will find a long, and in fact very interesting, history of prediction markets dating back to the 1500s. It also includes a reference to one of the most controversial and potentially destructive economists of all-time – Friedrich Hayek.

Neoliberal criticisms aside, the prediction markets we are concerned with are the ones that have popped up in recent years as a result of market diversification and the many features of the internet.

These modern prediction markets allow users to wager on the outcome of a wide range of events, including sporting matchups, social media mentions and even the weather in a number of US cities and towns.

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How Do They Work?

In prediction markets you buy ‘contracts’ on binary outcomes. The best way to describe how all of this works is through an example.

Imagine if you will, a scenario in which the Sacramento Kings are on a 10-game winning run (unlikely, I know) and everyone is getting carried away about how good the team are. Ahead of their next game you log onto a prediction market and see the following:

Sacramento Kings to Beat Washington Wizards

Yes: 75%

No: 25%

Instinct tells you to buy a contract in ‘Yes’ and trust the wisdom of the crowd – the probabilities on prediction markets are heavily influenced by what users as a collective predict to happen through their bets.

In this scenario though, you are a Kings fan and you know deep down that your team are utterly garbage. You’ve seen the previous 10 games and know that the results were built on a house of cards, so you predict this will be the game in which the team’s luck finally runs out.

Therefore, you wager $25 on ‘No’ and thus buy 100 contracts. When the Kings invariably lose, your contracts are paid out at a dollar apiece which returns you $100, minus the fluctuating service fees on the provider of your choice.

That is how prediction markets work.

What Makes Them Different to Online Gambling Sites?

The odds of prediction markets of course factor in current events, form and statistical analyses. They also however, take into account the behaviour of users, so if 1,000 people in a row back the Kings to win, the percentages begin to reflect that.

This is appealing to savvy betters as it gives them a chance to exploit the rare occasions when the wisdom of crowds is wrong.

Another difference is that you pay the provider a flat service fee, usually of around 2% on your winnings. There is no house edge factored into any of your wagers, and even if you were to view that 2% service fee as a house edge in its own right, it is still far, far lower than traditional casino edges.

Will Prediction Markets Take Over From Online Gambling Sites?

No. Casino gambling has been around for hundreds and hundreds of years – potentially thousands if archaeologists are right – and sports wagering has been around since the creation of sports. This is solid history.

Throughout that time, numerous threats and challenges have been fought off and repelled which shows the true staying power of the industry.

The most likely outcome is that prediction markets either fade away after a couple of years, or if they don’t, the greater gambling industry absorbs them and begins to use them as a means to further increase their profits.

So, if you have shares in American online gambling companies, or you’re lucky enough to be a CEO or owner of one such company, fear not. History tells us that the gambling industry is resilient to everything that has been thrown at it so far.

(All articles published here are Syndicated/Partnered/Sponsored feed, LatestLY Staff may not have modified or edited the content body. The views and facts appearing in the articles do not reflect the opinions of LatestLY, also LatestLY does not assume any responsibility or liability for the same.)