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Prediction market accuracy in the long run

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  • Berg, Joyce E.
  • Nelson, Forrest D.
  • Rietz, Thomas A.
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    Abstract

    "Prediction markets" are designed specifically to forecast events such as elections. Though election prediction markets have been being conducted for almost twenty years, to date nearly all of the evidence on efficiency compares election eve forecasts with final pre-election polls and actual outcomes. Here, we present evidence that prediction markets outperform polls for longer horizons. We gather national polls for the 1988 through 2004 U.S. Presidential elections and ask whether either the poll or a contemporaneous Iowa Electronic Markets vote-share market prediction is closer to the eventual outcome for the two-major-party vote split. We compare market predictions to 964 polls over the five Presidential elections since 1988. The market is closer to the eventual outcome 74% of the time. Further, the market significantly outperforms the polls in every election when forecasting more than 100Â days in advance.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 24 (2008)
    Issue (Month): 2 ()
    Pages: 285-300

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    Handle: RePEc:eee:intfor:v:24:y:2008:i:2:p:285-300

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    Web page: http://www.elsevier.com/locate/ijforecast

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    References

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    1. Jones, Randall J. & Armstrong, J. Scott & Cuzan, Alfred G., 2007. "Forecasting elections using expert surveys: an application to U.S. presidential elections," MPRA Paper 5301, University Library of Munich, Germany.
    2. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    3. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-61, December.
    4. Ray C. Fair, 1976. "The Effects of Economic Events on Votes for President," Cowles Foundation Discussion Papers 418, Cowles Foundation for Research in Economics, Yale University.
    5. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers 1854, Stanford University, Graduate School of Business.
    6. Forsythe, Robert & Rietz, Thomas A. & Ross, Thomas W., 1999. "Wishes, expectations and actions: a survey on price formation in election stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 39(1), pages 83-110, May.
    7. Kenneth Oliven & Thomas A. Rietz, 2004. "Suckers Are Born but Markets Are Made: Individual Rationality, Arbitrage, and Market Efficiency on an Electronic Futures Market," Management Science, INFORMS, vol. 50(3), pages 336-351, March.
    8. repec:reg:rpubli:259 is not listed on IDEAS
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    Citations

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    Cited by:
    1. Franck, Egon & Verbeek, Erwin & Nüesch, Stephan, 2010. "Prediction accuracy of different market structures -- bookmakers versus a betting exchange," International Journal of Forecasting, Elsevier, vol. 26(3), pages 448-459, July.
    2. Peter Cramton & Luciano I. de Castro, 2009. "Prediction Markets to Forecast Electricity Demand," Discussion Papers 1527, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Armstrong, J. Scott & Graefe, Andreas, 2011. "Predicting elections from biographical information about candidates: A test of the index method," Journal of Business Research, Elsevier, vol. 64(7), pages 699-706, July.
    4. Graefe, Andreas & Armstrong, J. Scott, 2011. "Comparing face-to-face meetings, nominal groups, Delphi and prediction markets on an estimation task," International Journal of Forecasting, Elsevier, vol. 27(1), pages 183-195, January.
    5. Edoardo Gaffeo, 2013. "Using information markets in grantmaking. An assessment of the issues involved and an application to Italian banking foundations," DEM Discussion Papers 2013/08, Department of Economics and Management.
    6. Calvin Blackwell, 2010. "Rational Expectations in the Classroom: A Learning Activity," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 10(2), pages 1-6, Fall.
    7. Philipp Denter & Dana Sisak, 2013. "Do Polls create Momentum in Political Competition?," Tinbergen Institute Discussion Papers 13-169/VII, Tinbergen Institute.
    8. Wright, George & Rowe, Gene, 2011. "Group-based judgmental forecasting: An integration of extant knowledge and the development of priorities for a new research agenda," International Journal of Forecasting, Elsevier, vol. 27(1), pages 1-13, January.
    9. Agrawal, Shipra & Megiddo, Nimrod & Armbruster, Benjamin, 2010. "Equilibrium in prediction markets with buyers and sellers," Economics Letters, Elsevier, vol. 109(1), pages 46-49, October.
    10. Graefe, Andreas & Armstrong, J. Scott & Jones, Randall J. & Cuzán, Alfred G., 2014. "Combining forecasts: An application to elections," International Journal of Forecasting, Elsevier, vol. 30(1), pages 43-54.
    11. Denter, Philipp & Sisak, Dana, 2013. "Do Polls Create Momentum in Political Campaigns?," Economics Working Paper Series 1326, University of St. Gallen, School of Economics and Political Science.
    12. Tideman, T. Nicolaus & Plassmann, Florenz, 2010. "Pricing externalities," European Journal of Political Economy, Elsevier, vol. 26(2), pages 176-184, June.
    13. Calvin Blackwell & Robert Pickford, 2011. "The wisdom of the few or the wisdom of the many? An indirect test of the marginal trader hypothesis," Journal of Economics and Finance, Springer, vol. 35(2), pages 164-180, April.

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