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Prediction Markets in Theory and Practice

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Author Info

  • Wolfers, Justin

    (U of Pennsylvania)

  • Zitzewitz, Eric

    (Stanford U)

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 Stanford University, Graduate School of Business in its series Research Papers with number 1927.

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Date of creation: Feb 2006
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Handle: RePEc:ecl:stabus:1927

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References

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  1. 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.
  2. Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc.
  3. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," Working paper 230, Regulation2point0.
  4. Justin Wolfers & Eric Zitzewitz, 2006. "Five Open Questions About Prediction Markets," NBER Working Papers 12060, National Bureau of Economic Research, Inc.
  5. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series 2006-11, Federal Reserve Bank of San Francisco.
  6. 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.
  7. Brian Knight, 2004. "Are Policy Platforms Capitalized into Equity Prices? Evidence from the Bush/Gore 2000 Presidential Election," NBER Working Papers 10333, National Bureau of Economic Research, Inc.
  8. 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.
  9. Refet Gürkaynak & Justin Wolfers, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 11-50 National Bureau of Economic Research, Inc.
  10. Snowberg, Erik & Wolfers, Justin, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," IZA Discussion Papers 4884, Institute for the Study of Labor (IZA).
  11. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," NBER Working Papers 10504, National Bureau of Economic Research, Inc.
  12. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  13. Justin Wolfers & Eric Zitzewitz, 2004. "Experimental Political Betting Markets and the 2004 Election," The Economists' Voice, De Gruyter, vol. 1(2), pages 1.
  14. 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.
  15. 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.
  16. repec:feb:natura:0026 is not listed on IDEAS
  17. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, vol. 128(1), pages 257-274, July.
  18. 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.
  19. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
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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. Menno Middeldorp & Clemens Kool & Stephanie Rosenkranz, 2007. "Listening Without Understanding," Working Papers 07-19, Utrecht School of Economics.

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