The dream is that prediction markets greatly outperform individual experts, but there’s a limit on how much this can actually happen. The reason prediction markets aren’t more useful is that you can only profit from a prediction market if gathering information is cheaper than the money you’d make from gathering it.

Let’s imagine I write down either “horse” or “donkey” on a slip of paper, and put that paper in a drawer in my kitchen. I then create a prediction market based on what’s written on the paper. The market would sit at around 50%. Maybe people would analyze all the public information about me, and find out that I once rode a horse when I was seven, or whatever. So maybe it sits at 51% for horse, and 49% for donkey. And despite a really sophisticated analysis of all the public information, sifting through my social media posts, trying to guess which word I’d write, you really have no idea what’s written on the paper. The 51% horse estimate would be robust, but uninformative about reality.

Now let’s say the prediction market for my slip of paper went really viral, and billions of dollars were being spent on it. Since people really like money, they decide to start breaking into my house to see the paper, or kidnapping me, or whatever. Now the market is at 99% donkey, 1% horse, and some people made a lot of money correcting the market. And now the market is much more informative about what’s on the slip of paper.

Why was the market originally so uninformative? It’s because the cost of acquiring better information (including the risk of going to prison) was higher than the value of that information. Prediction markets can only incentivize the collection of information that’s cheaper to collect than the money you stand to gain from collecting it. It’s only worth launching a satellite into space to view oil tank levels if there’s a huge market for oil. If the market for oil was only $1 million, then you would not spend over a million dollars launching a satellite to give you an edge trading on that market. And hence our public estimates of the world’s oil supply would be worse if the market for oil was much smaller.

We know, based on the Polymarket market, there’s a 22% chance Ali Khamenei will be ousted by January 31. We can trust that’s a good estimate with respect to the public information available. But it’s not very informative. The public information is just not that good. If we could fully analyze every atom on Earth with a far-future supercomputer, we could get the estimate down below 1% or up above 99%. The future is basically knowable. But the prediction market is not a tool that makes the future knowable in this case.

At least, not at a volume of $19.5 million. Maybe if the volume was much higher, people would be willing to hack into Donald Trump’s emails, or for that matter go to Iran and shoot Khamenei themselves. Then the market would collapse, and we’d know the truth. But until such time, no amount of recombination or analysis of the information we have will tell us what’s going to happen.

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