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The Effects of Prediction Market Design and Price Elasticity on Trading Performance of Users: An Experimental Analysis

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  • Ivo Blohm
  • Christoph Riedl
  • Johann F\"uller
  • Orhan K\"oroglu
  • Jan Marco Leimeister
  • Helmut Krcmar
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    Abstract

    We employ a 2x3 factorial experiment to study two central factors in the design of prediction markets (PMs) for idea evaluation: the overall design of the PM, and the elasticity of market prices set by a market maker. The results show that 'multi-market designs' on which each contract is traded on a separate PM lead to significantly higher trading performance than 'single-markets' that handle all contracts one on PM. Price elasticity has no direct effect on trading performance, but a significant interaction effect with market design implies that the performance difference between the market designs is highest in settings of moderate price elasticity. We contribute to the emerging research stream of PM design through an unprecedented experiment which compares current market designs.

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    File URL: http://arxiv.org/pdf/1204.3457
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1204.3457.

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    Date of creation: Apr 2012
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    Handle: RePEc:arx:papers:1204.3457

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    Web page: http://arxiv.org/

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    1. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers, Stanford University, Graduate School of Business 1854, Stanford University, Graduate School of Business.
    2. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2010. "Idea Generation and the Quality of the Best Idea," Management Science, INFORMS, INFORMS, vol. 56(4), pages 591-605, April.
    3. Snowberg, Erik & Wolfers, Justin, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7801, C.E.P.R. Discussion Papers.
    4. Henry Berg & Todd A. Proebsting, 2009. "Hanson's Automated Market Maker," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 3(1), pages 45-59, April.
    5. Gerrit Kamp & Peter Koen, 2009. "Improving the Idea Screening Process within Organizations using Prediction Markets: A Theoretical Perspective," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 3(2), pages 39-64, August.
    6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
    7. repec:reg:wpaper:259 is not listed on IDEAS
    8. Franke, Nikolaus & Shah, Sonali, 2003. "How communities support innovative activities: an exploration of assistance and sharing among end-users," Research Policy, Elsevier, Elsevier, vol. 32(1), pages 157-178, January.
    9. Beardsley, George & Mansfield, Edwin, 1978. "A Note on the Accuracy of Industrial Forecasts of the Profitability of New Products and Processes," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 51(1), pages 127-35, January.
    10. repec:reg:rpubli:259 is not listed on IDEAS
    11. Armstrong, J. Scott & Collopy, Fred, 1992. "Error measures for generalizing about forecasting methods: Empirical comparisons," International Journal of Forecasting, Elsevier, Elsevier, vol. 8(1), pages 69-80, June.
    12. Stefan Luckner & Christof Weinhardt, 2007. "How to Pay Traders in Information Markets: Results from a Field Experiment," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 1(2), pages 147-156, July.
    13. Christian Slamka & Wolfgang Jank & Bernd Skiera, 2012. "Secondā€Generation Prediction Markets for Information Aggregation: A Comparison of Payoff Mechanisms," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(6), pages 469-489, 09.
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