Prediction markets are usually implemented as binary options. Like vanilla options, their price depends not just on the most likely outcome, but the whole distribution. When uncertainty increases (imagine squishing a mound of clay), you end up pushing lots of probability mass (clay) to the other side of the bet and the expectation of the payoff (used to make a price) tends towards 1/2.
It's the same as bookies, right? They are often seen as predicting the odds of an event happening, but that's actually the odds they estimate so that the bets are roughly divided 50/50, to limit their exposure, which is pretty different and depends on their market. English bookies will always overrate the chance of England winning at football, because English people will disproportionately place a bet for their team to win.
I don't think it's that simple - if other people find out English bookies overrate England, then they make a profit by betting against. I'm not saying every market is perfectly efficient but it would be surprising if a major inefficiency lasted for a while. And if "enough" bets are placed the set odds will always be an unbiased estimate of the true odds.
Sports bookies have a significant informational advantage over the everyday gambler; they index massive amounts of historical data and have access to live data which is lower-latency than radio or television broadcasts. That helps make the market inefficient.
> When uncertainty increases (imagine squishing a mound of clay), you end up pushing lots of probability mass (clay) to the other side of the bet and the expectation of the payoff (used to make a price) tends towards 1/2.
This doesn't make any sense. If you think the chances of someone of getting elected is very high (eg. Putin getting re-elected), nobody will be buying shares in him losing. True, the shares of "putin loses" is dirt cheap, but that doesn't mean much if he has a high chance of getting elected.
It matters a lot what the price is of "putin loses." If Putin does in fact lose 5% of the time, but the odds are 3%, you should bet on it. It may feel silly to do that in this instance but consider what happens if you regularly bet in prediction markets. Always betting on the "putin wins" outcome loses money in the long run.
https://www.youtube.com/watch?v=YRvPF__du9w
Prediction markets are usually implemented as binary options. Like vanilla options, their price depends not just on the most likely outcome, but the whole distribution. When uncertainty increases (imagine squishing a mound of clay), you end up pushing lots of probability mass (clay) to the other side of the bet and the expectation of the payoff (used to make a price) tends towards 1/2.