Naive traders and mispricing in prediction markets
AbstractThis paper studies pricing patterns in a speculative market with asymmetric information populated by both sophisticated and naive traders. Three pricing regimes arise in equilibrium: perfect pricing, with prices equalling asset values, partial mispricing and complete mispricing. Perfect pricing obtains when the presence of naive traders is small although not necessarily zero. When the fraction of naive traders is moderate prices are correct for some values but not for others. Finally, complete mispricing typically arises when the presence of naive traders is sufficiently high. Mispricing exhibits a systematic pattern of overpricing low values and underpricing high values.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 147 (2012)
Issue (Month): 5 ()
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Web page: http://www.elsevier.com/locate/inca/622869
Naive traders; Double auction; Common values; Private information; Prediction markets; Favorite-longshot bias;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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