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I dove into the prediction markets rabbit hole a number of years back. And I’ve personally seen witnessed scenarios where the wisdom of crowds seems to really work. What I have not really—including in this piece—read is rigorous theory of what makes it effective or not. There are hints here and in the Wisdom of Crowds book but I’ve never read a really comprehensive theory.

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Author here. Hal Varian pointed me to this 1992 paper, which I think is still considered the canonical empirical piece on what is actually going on in trading behavior that leads to accuracy (or not): https://www.jstor.org/stable/2117471

Insider trading is a part of it. If someone bets a few billion dollars that America will invade Iran, the probability shoots up to 98%, even though nobody else thinks it will happen. They can then run a press release about how their platform predicted the invasion before anyone else did.

These were Oscar predictions and similar. So no insider trading and, when I wrote about, the prevalence of major prediction sites on the Internet seemed to degrade the crowd wisdom because so many people just went with what a few sites were picking.

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