Evercore ISI strategists, led by Julian Emanuel, have identified the conditions under which prediction markets are most helpful for forecasting. According to their May 17 report, prediction markets with high trading volume and short-term contracts that ask simple questions with clear resolution rules tend to produce more reliable probabilities than those with low volume or ambiguous outcomes [1]. The strategists found that contracts with higher volume are more dependable, while those closer to their termination date show stronger probability signals compared to long-term contracts [1].
Despite the growth in prediction markets, Evercore ISI cautioned against viewing them as a definitive forecasting tool, noting, 'Their limitation is that they do not discover the future so much as reveal what the crowd believes' [1]. The report highlighted that only about 8% of events on platforms like Kalshi and Polymarket clear $1 million in volume, and nearly 60% of live markets have less than $1,000 in trading volume, with only about 5.3% reaching at least $100,000 [1].
The strategists emphasized that prediction markets are particularly effective during chaotic macro events, as they respond quickly to headlines and real-life developments, unlike traditional forecasting tools that may suffer from polling errors, expert bias, or subjective judgment [1]. However, they also warned that the diversity of market participants—ranging from macro traders to those trading for entertainment or hedging—can 'contaminate' market prices, especially in geopolitical markets where trades may reflect political views or fears rather than pure forecasting [1].
Evercore ISI also noted that thin markets can be easily influenced by large traders, potentially distorting outcomes. Additionally, contracts with ambiguous outcomes, such as 'will a ceasefire hold?', may not accurately reflect the actual event, while overly simple binary contracts may fail to capture the full scope of uncertainty investors need to assess [1].
CONCLUSION
Evercore ISI's analysis suggests that prediction markets are most reliable when they are high-volume, short-term, and have clear resolution criteria. However, limitations such as low participation, ambiguous contract terms, and the influence of non-forecasting motives can reduce their effectiveness. Investors should use prediction markets as a gauge of consensus probability rather than a definitive forecasting tool.