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Prediction Markets

Prediction Markets. Justin Wolfers and Eric Zitzewitz. Quality of Predictions. Political domain Markets predict better than polls Economic derivatives Markets do no better than the “consensus” forecast. Why Would Markets Do Better?. Incentives to produce new information

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Prediction Markets

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  1. Prediction Markets Justin Wolfers andEric Zitzewitz

  2. Quality of Predictions • Political domain • Markets predict better than polls • Economic derivatives • Markets do no better than the “consensus” forecast

  3. Why Would Markets Do Better? • Incentives to produce new information • Unlikely given the low incentives • Not even quite clear to what extent traders are motivated by monetary gains (NFL example) • Truthful revelation of available information • Experimental markets in firms • Superior aggregation of information

  4. Superior Aggregation • Gallup Poll Question: Next, we’d like you to think about the general election for President to be held in November. If Vice-President Al Gore were the Democratic Party’s candidate and Texas Governor George W. Bush were the Republican Party’s candidate, who would you be more likely to vote for? • A “Gore” answer implies that there is a probability p>.5 that the person will vote for Gore • If .6 say they vote for Gore, the fraction who will vote for Gore lies in the interval [.3,.8]

  5. Probabilistic Information • How likely is it that you will vote in the 2000 election for President [definitely vote, probably vote, probably not vote, definitely not vote]? • What do you think is the percent chance that you will cast a vote for President? • 72% say they will “definitely vote” • 54% are 100% certain, 10% vote with probability [.91-.99], 8% with probabilty [.51-.9]

  6. Consequences • Market design • TradeSports.com offers contract for 2004 Year End Unemployment Rate to be ON or ABOVE 4.5% • Probabilistic elicitation • Much more optimism about the possibility to elicit probabilistic information • “early” results indicate good predictive power of probabilistic information (Nyarko and Schotter, 2002)

  7. Questions • To what extent is the superiority of prediction markets the result of information that is particularly difficult to aggregate? • Are prices market probabilities? (part II) • Prices do not equal the mean beliefs of traders (Manski, 2004) • Are (betting) budgets statistically independent of beliefs?

  8. Questions II • What happens if we take prediction markets seriously? • We could use markets to predict counterfactuals • How many soldiers will die in a war • Which division has the greater chance of success? • Payoff now depends on the likelihood of predicting the right outcome plus the likelihood that trading changes economic consequences • Manipulation • Little historic evidence (Rhode and Strumpf, 2004) • Strategic provision of information • Unexpected accruals and incentive compensation (Bergstresser&Phillipon, 2003; Gao&Shrieves, 2003)

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