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Prediction Markets in Theory and Practice

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Author Info

  • Wolfers, Justin

    ()
    (University of Michigan)

  • Zitzewitz, Eric

    ()
    (Dartmouth College)

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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File URL: http://ftp.iza.org/dp1991.pdf
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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1991.

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Length: 17 pages
Date of creation: Mar 2006
Date of revision:
Publication status: published in: Larry Blume and Steven Durlauf (eds), The New Palgrave Dictionary of Economics, 2nd ed (London: Palgrave), 2007
Handle: RePEc:iza:izadps:dp1991

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Keywords: information aggregation; information markets; prediction markets;

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References

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  1. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan impacts on the economy: evidence from prediction markets and close elections," Working Paper Series, Federal Reserve Bank of San Francisco 2006-08, Federal Reserve Bank of San Francisco.
  2. 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).
  3. repec:reg:wpaper:430 is not listed on IDEAS
  4. Gürkaynak, Refet S. & Wolfers, Justin, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk," IZA Discussion Papers 1899, Institute for the Study of Labor (IZA).
  5. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series, Federal Reserve Bank of San Francisco 2006-11, Federal Reserve Bank of San Francisco.
  6. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers, Stanford University, Graduate School of Business 1854, Stanford University, Graduate School of Business.
  7. 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.
  8. Wolfers, Justin & Zitzewitz, Eric, 2006. "Five Open Questions About Prediction Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5562, C.E.P.R. Discussion Papers.
  9. 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.
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  12. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 264-72, March.
  13. 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.
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  16. 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.
  17. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, Elsevier, vol. 91(3), pages 425-429, June.
  18. 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.
  19. 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.
  20. Paul W. Rhode & Koleman S. Strumpf, 2004. "Historical Presidential Betting Markets," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(2), pages 127-141, Spring.
  21. 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.
  22. 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.
  23. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, Springer, vol. 128(1), pages 257-274, July.
  24. 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.
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  26. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments, The Field Experiments Website 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. 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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