Prediction markets, where users bet on binary outcomes, are gaining traction in financial forecasting. A recent study by the London Business School and Yale University revealed that these markets were more accurate than sell-side analysts in predicting whether a company would beat earnings expectations. Between September and November, prediction markets correctly picked 68 per cent of earnings announcements a week out from the result, and 77 per cent the day before, compared to analysts’ 62 per cent accuracy. Polymarket, one such platform, recently launched a category dedicated to forecasting earnings of publicly traded companies.
The study’s authors attribute the advantage of prediction markets to real-time updates, absence of conflicts of interest, and the fact that participants have financial skin in the game. Concerns exist that analyst forecasts may be skewed by investment banking ties or incentives to generate trading commissions. Damien Boey from Wilson Asset Management noted that judging markets better requires more than a test of accuracy, including judging the norms of company disclosure.
Despite the advantages, some industry figures express reservations. Liquidity remains thin, with bets on earnings announcements averaging $US23,000 per company. Thomas Rice of Minotaur Capital is concerned about potential insider trading, given the anonymity offered by these platforms. Prediction markets involve users taking bets on binary outcomes – such as yes/no or more/less – with the trading platforms charging a fee on each trade. The prices, ranging from zero to $1, are determined by the market’s perceived probability so 50¢ represents a 50-50 chance.
While prediction markets are considered illegal gambling in Australia, they are gaining legitimacy in the US, with platforms like Polymarket partnering with major news outlets. However, the largely unregulated industry faces pushback from regulators, including a consumer alert from the New York Attorney General. Steven Pettigrove of Piper Alderman noted that prediction markets exist in a regulatory grey area, anticipating significant regulatory compliance should these products emerge in Australia.
