Risk, Intuition, and Common Sense

This is the seventh in a series on the fundamentals of prediction markets. The previous article explained how parimutuel pools work. A bookmaker offers fixed odds bets and serves as counterparty and operator for bets placed with customers (bettors) on its platform. Consider an American football match between New York and Philadelphia.

This is the sixth in a series on the fundamentals of prediction markets. The previous article mapped the prediction market ecosystem: risk takers, middlemen, and enforcers. A parimutuel pool aggregates stakes over all outcomes for a given event and pays out winners by dividing these aggregated stakes (minus a takeout) dollar-for-dollar over all stakes on the winning outcome. Parimutuel pools are most often operated by a totalisator, or tote.

This is the fifth in a series on the fundamentals of prediction markets. The prediction market ecosystem is made up of three core constituencies: risk takers, middlemen, and enforcers. In most cases, it is sufficient to think of risk takers as bettors, middlemen as operators, and enforcers as regulators, but there are some exceptions.

Are event contracts financial assets, or are they just sports bets with a different name? Prediction market companies claim the former.

Are event contracts financial assets, or are they just sports bets with a different name? Prediction market companies claim the former.

This is the third in a series on the fundamentals of prediction markets. The previous article examined the anatomy of a bet and the challenge of scaling the basic concept of a bet from a simple handshake to a global industry. The stake of a bet is the amount risked. The payout of a bet is the amount received by the winning party. The odds of a bet is the payout per unit of stake risked. The price of a bet is the stake required per unit payout.

This is the fourth in a series on the fundamentals of prediction markets. The previous article covered stake, payout, and the language of odds. The fundamental component of any bet is the underlying event. The event determines how much will be bet in the market, how the market will resolve, and who cares about it. For a bet to be properly administered, its underlying event must be well-defined.

This is the second in a series on the fundamentals of prediction markets. The first article defined what a prediction market is and why they matter now more than ever. A bet is the risking of something of value based on the resolution of something that is unknown. At its core, every prediction market, regardless of market mechanism, regulatory framework, and technological implementation, is a platform for executing bets.

Yesterday at the Next.io conference in New York, I spoke on a panel called “The Bettor’s Reality” about the state of sports betting regulation in the US. The short version: eight years after PASPA, the regulatory framework has failed the bettor. Operators limit and ban winners, regulators protect operators instead of customers, and the biggest “innovation” of the era is the same game parlay — a product that holds 40–50% on a single wager. More on that discussion can be found here.

A prediction market is any mechanism that incentivizes participants to accurately predict the outcome of something unknown. For us, the term “prediction market” includes sportsbooks, parimutuel pools, and betting exchanges. All of these platforms “incentivize participants to accurately predict the outcome of something unknown,” and therefore they are all prediction markets for our purposes.