How Markets Reflect Expectations

Enlarge

Digital markets reflect not only prices but also expectations

Prof. Dr. Martin Spann, Director of the Institute for Electronic Commerce and Digital Markets at the LMU Munich School of Management, has been studying for many years how prediction markets function, what information is incorporated into prices, and what implications this has for the economy, politics, and consumer behavior.

Prediction markets as a field of research

Platforms such as Polymarket or Kalshi demonstrate how events can be traded on markets. Participants there bet on political developments or other real-world events. A central element here is the price. From a scientific perspective, Prof. Dr. Martin Spann finds such platforms interesting as speculative markets and as systems in which information is aggregated. The price can be understood as a forecast for the occurrence of an event because participants bring their expectations and information into the market.

“At the same time, participants bring their information into the market. This results in a price that can be interpreted as a forecast for the event.”

When Many Estimates Come Together

The starting point is microeconomic theory, which holds that markets reflect the expectations of their participants. Spann has been studying such markets for more than 20 years and focuses on developing prediction markets and applying them to other areas, such as product ideas, market launches, or sales forecasts.

The central question is how collective assessments emerge. Prediction markets are considered an example of so-called swarm intelligence. According to this principle, many individual assessments can together yield a reliable prediction. This works particularly well when participants actually have their own information. That is why prediction markets are more of a supplement to surveys than a replacement.

Regulation, Technology, and Risks

Spann attributes the current surge in attention surrounding prediction markets to two developments: regulatory changes and technological innovations. While Kalshi has been licensed as a regulated market in the U.S., Polymarket utilizes blockchain technology, which simplifies participation and makes it more accessible internationally.

At the same time, such markets also raise critical questions. Spann points to potential manipulation, issues arising from insider knowledge, and sensitive information that could become visible through market movements. This is another reason why he is skeptical about the approval of such betting in Germany.

Prediction Markets in Companies and Prices in Everyday Life

Spann has also studied prediction markets within companies. There, employees could submit ideas, which were then traded as “idea shares” using play money. This made it possible to assess which proposals were considered particularly promising. At Carl Zeiss, around 250 ideas were collected and evaluated in this way.

In addition, Prof. Dr. Martin Spann conducts research on everyday pricing, such as dynamic pricing in retail. Digital price tags or fluctuating online prices can mean more effort for consumers to compare prices. Such prices can rise and fall. Price differences can be compared primarily with supply and demand as well as with changes over time.

Spann takes a cautious view of government intervention in pricing processes, such as at gas stations. In his view, fixed rules do not automatically lead to lower prices. For consumers, he says, the most important thing is being able to compare prices.