Your initial thesis is not supported by your observations, which anyway are problematic.
(1) This is not a "fundamental problem." Not every participant in the NYSE is a savvy investor, either.
(2) This was also true of the automobile market. It didn't stop Henry Ford. This is a serious incidental problem, but not a fundamental one.
(3) The best way to make money in a prediction market is to be able to predict the outcome of the predictions. You can also try to do what you're suggesting, and may have some success. Anyway, the evidence is that prediction markets work, both for hedging and for knowledge prediction.
The best way to make money in a prediction market is to be able to predict the outcome of the predictions.
I don't think this says quite what you meant. :-) As it stands, it can be read as saying that you can make money by predicting what other people believe, which is in agreement with the parent's #3. (And which is also true--as I noted just upthread, the author of the article in the OP did exactly that by buying and then selling McCain bets for the 2008 election.)
This is a pointless nit pick, but two can play at that game.
The outcome of the predictions is that all the correct predictions resolve to 1 (or 100% or what have you) and all the incorrect predictions resolve to 0.
Technically, I said what I wanted to say. Technical correctness is the best kind of correctness. ;)
(1) This is not a "fundamental problem." Not every participant in the NYSE is a savvy investor, either.
(2) This was also true of the automobile market. It didn't stop Henry Ford. This is a serious incidental problem, but not a fundamental one.
(3) The best way to make money in a prediction market is to be able to predict the outcome of the predictions. You can also try to do what you're suggesting, and may have some success. Anyway, the evidence is that prediction markets work, both for hedging and for knowledge prediction.