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Prediction Markets in Theory and Practice

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Author Info

  • Wolfers, Justin
  • Zitzewitz, Eric

Abstract

Prediction Markets, sometimes referred to as 'information markets', 'idea futures' or 'event futures', are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5578.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5578

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Related research

Keywords: event futures; forecasting; futures; information aggregation; information markets; prediction markets;

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References

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  1. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
  2. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," IZA Discussion Papers 2092, Institute for the Study of Labor (IZA).
  3. repec:reg:rpubli:259 is not listed on IDEAS
  4. repec:reg:rpubli:430 is not listed on IDEAS
  5. 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.
  6. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
  7. Justin Wolfers & Eric Zitzewitz, 2009. "Using Markets to Inform Policy: The Case of the Iraq War," Economica, London School of Economics and Political Science, vol. 76(302), pages 225-250, 04.
  8. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," Working paper 230, Regulation2point0.
  9. Wolfers, Justin & Zitzewitz, Eric, 2006. "Five Open Questions About Prediction Markets," IZA Discussion Papers 1975, Institute for the Study of Labor (IZA).
  10. Berg, Joyce & Forsythe, Robert & Nelson, Forrest & Rietz, Thomas, 2008. "Results from a Dozen Years of Election Futures Markets Research," Handbook of Experimental Economics Results, Elsevier.
  11. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," NBER Working Papers 10504, National Bureau of Economic Research, Inc.
  12. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Knight*, Brian, 2007. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 389-409, February.
  14. Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc.
  15. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 457-482, June.
  16. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 723-746, 08.
  17. G�rkaynak, Refet S. & Wolfers, Justin, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk," Working paper 82, Regulation2point0.
  18. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
  19. 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.
  20. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, vol. 128(1), pages 257-274, July.
  21. repec:reg:rpubli:82 is not listed on IDEAS
  22. Wolfers Justin & Zitzewitz Eric, 2004. "Experimental Political Betting Markets and the 2004 Election," The Economists' Voice, De Gruyter, vol. 1(2), pages 1-8, October.
  23. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
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Blog mentions

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  1. Why did Reddit get the wrong guy? (Or: the Wisdom of Crowds vs. the Madness of Mobs)
    by Noah Smith in Noahpinion on 2013-04-21 20:28:00
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Cited by:
  1. C.J.M. Kool & S. Rosenkranz & M. Middeldorp, 2007. "Listening without understanding: Central Bank transparency, financial markets and the crowding out of private information," Working Papers 07-19, Utrecht School of Economics.

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