What is a key characteristic of a prediction market?

• A. Prices are fixed in advance
• B. Only sports events are included
• C. Trading is done with a single bookmaker
• D. Prices reflect collective beliefs about probabilities of outcomes

Answer: (D)

In prediction markets, the central idea is that prices reveal the crowd’s estimate of how likely an outcome is. Each contract pays out a fixed amount (often $1) if the event occurs, so the current price at which the contract trades can be interpreted as the market’s probability assessment of that event. As new information comes in or participants act on different insights, trades push the price up or down, updating the collective probability everyone assigns to the outcome. This makes the market a kind of living forecast, aggregating diverse information from many players rather than relying on a single source.

That’s why the best answer is the one stating that prices reflect collective beliefs about probabilities of outcomes. Other options don’t fit because prices aren’t fixed in advance, markets aren’t limited to sports, and trading isn’t done with a single bookmaker.