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Prediction Markets in Theory and Practice

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  • 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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  1. 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.
  2. Wolfers Justin & Zitzewitz Eric, 2004. "Experimental Political Betting Markets and the 2004 Election," The Economists' Voice, De Gruyter, De Gruyter, vol. 1(2), pages 1-8, October.
  3. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 264-72, March.
  4. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers, Stanford University, Graduate School of Business 1854, Stanford University, Graduate School of Business.
  5. repec:reg:wpaper:259 is not listed on IDEAS
  6. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
  7. repec:reg:wpaper:82 is not listed on IDEAS
  8. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CESifo Working Paper Series 3029, CESifo Group Munich.
  9. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(3), pages 457-482, June.
  10. 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.
  11. 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, Elsevier.
  12. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5591, C.E.P.R. Discussion Papers.
  14. Justin Wolfers & Eric Zitzewitz, 2006. "Five open questions about prediction markets," Working Paper Series, Federal Reserve Bank of San Francisco 2006-06, Federal Reserve Bank of San Francisco.
  15. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, Springer, vol. 128(1), pages 257-274, July.
  16. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5676, C.E.P.R. Discussion Papers.
  17. Slemrod, Joel & Greimel, Timothy, 1999. "Did Steve Forbes scare the US municipal bond market?," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 81-96, October.
  18. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1992-19, Carnegie Mellon University, Tepper School of Business.
  19. 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.
  20. repec:reg:rpubli:430 is not listed on IDEAS
  21. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, American Economic Association, vol. 66(2), pages 246-53, May.
  22. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, Elsevier, vol. 91(3), pages 425-429, June.
  23. Justin Wolfers & Eric Zitzewitz, 2009. "Using Markets to Inform Policy: The Case of the Iraq War," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 76(302), pages 225-250, 04.
  24. repec:reg:wpaper:430 is not listed on IDEAS
  25. repec:reg:rpubli:259 is not listed on IDEAS
  26. repec:reg:rpubli:82 is not listed on IDEAS
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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, Utrecht School of Economics 07-19, Utrecht School of Economics.

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