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Prediction Markets

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  • Justin Wolfers
  • Eric Zitzewitz

Abstract

We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of uncertain future events. Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks. Carefully designed contracts can yield insight into the market's expectations about probabilities, means and medians, and also uncertainty about these parameters. Moreover, conditional markets can effectively reveal the market's beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation. We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 18 (2004)
Issue (Month): 2 (Spring)
Pages: 107-126

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Handle: RePEc:aea:jecper:v:18:y:2004:i:2:p:107-126

Note: DOI: 10.1257/0895330041371321
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  1. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 107-126, Spring.
  2. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
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  5. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Andrew Leigh & Justin Wolfers & Eric Zitzewitz, 2003. "What Do Financial Markets Think of War in Iraq?," NBER Working Papers 9587, National Bureau of Economic Research, Inc.
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  8. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
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  10. Bates, David S, 1991. " The Crash of '87: Was It Expected? The Evidence from Options Markets," Journal of Finance, American Finance Association, vol. 46(3), pages 1009-44, July.
  11. Joel Slemrod & Timothy Greimel, 1998. "Did Steve Forbes Scare the Municipal Bond Market?," NBER Working Papers 6583, National Bureau of Economic Research, Inc.
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  13. Paul W. Rhode & Koleman S. Strumpf, 2004. "Historical Presidential Betting Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 127-141, Spring.
  14. repec:reg:rpubli:259 is not listed on IDEAS
  15. Slemrod, Joel & Greimel, Timothy, 1999. "Did Steve Forbes scare the US municipal bond market?," Journal of Public Economics, Elsevier, vol. 74(1), pages 81-96, October.
  16. Ait-Sahalia, Yacine & Wang, Yubo & Yared, Francis, 2001. "Do option markets correctly price the probabilities of movement of the underlying asset?," Journal of Econometrics, Elsevier, vol. 102(1), pages 67-110, May.
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