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Public Information Bias and Prediction Market Accuracy

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  • Thomas S. Gruca
  • Joyce E. Berg
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    Abstract

    How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.

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    File URL: http://www.ingentaconnect.com/content/ubpl/jpm/2007/00000001/00000003/art00004
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    Bibliographic Info

    Article provided by University of Buckingham Press in its journal Journal of Prediction Markets.

    Volume (Year): 1 (2007)
    Issue (Month): 3 (December)
    Pages: 219-231

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    Handle: RePEc:buc:jpredm:v:1:y:2007:i:3:p:219-231

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    Web page: http://www.ubpl.co.uk/

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    Web: http://www.predictionmarketjournal.com/index_files/Page418.htm

    Related research

    Keywords: PREDICTION MARKETS; INFORMATION AGGREGATION; ELECTION FORECASTING; PUBLIC INFORMATION;

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    Cited by:
    1. Smith, Michael A. & Paton, David & Williams, Leighton Vaughan, 2009. "Do bookmakers possess superior skills to bettors in predicting outcomes?," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 539-549, August.

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