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The wisdom of prediction markets

Stock-market investors should look for opportunities arising from breakdowns in cognitive diversity

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    • Prediction markets are very well calibrated as measured by the relationship between the implied probability and the outcome. 
    • Prediction markets are very well calibrated as measured by the relationship between the implied probability and the outcome.  IMAGE: PIXABAY

    Michael Mauboussin

    Published Tue, Oct 13, 2026 · 02:42 PM

    IN 1932, Bernard Baruch, a financier who made his fortune on Wall Street, wrote the foreword to a reprint of the 1852 edition of Charles Mackay’s classic book Extraordinary Popular Delusions and the Madness of Crowds.

    He cited a quote by the German playwright Friedrich Schiller: “Anyone taken as an individual, is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead.”

    Any theory of the stock market must explain why prices are usually sensible but periodically go bonkers.

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