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Prediction Markets in Theory and Practice

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Author Info
Justin Wolfers () (Wharton, University of Pennsylvania, CEPR, NBER and IZA Bonn)
Eric Zitzewitz () (Stanford GSB)

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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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Publisher 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:
Handle: RePEc:iza:izadps:dp1991

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Related research
Keywords: prediction markets; information markets; information aggregation;

Other versions of this item:

Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Justin Wolfers & Eric Zitzewitz, 2006. "Five Open Questions About Prediction Markets," NBER Working Papers 12060, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
  4. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan impacts on the economy: evidence from prediction markets and close elections," Working Paper Series 2006-08, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  5. Plott, Charles R. & Chen, Kay-Yut, 2002. "Information Aggregation Mechanisms: Concept, Design and Implementation for a Sales Forecasting Problem," Working Papers 1131, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Camerer, Colin, 1996. "Can Asset Markets be Manipulated? A Field Experiment with Racetrack Betting," Working Papers 983, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  8. Refet Gurkaynak & 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 National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," NBER Working Papers 10504, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  11. repec:bep:evoice:1:2007:2:1 is not listed on IDEAS
  12. 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. [Downloadable!] (restricted)
  13. 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.
  14. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Natural Field Experiments 0026, The Field Experiments Website. [Downloadable!]
  15. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February. [Downloadable!] (restricted)
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  16. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, vol. 128(1), pages 257-274, July. [Downloadable!] (restricted)
  17. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," CEPR Discussion Papers 5676, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  18. Knight, Brian, 2006. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 751-773, May. [Downloadable!] (restricted)
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  19. Paul W. Rhode & Koleman S. Strumpf, 2004. "Historical Presidential Betting Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 127-142, Spring. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Menno Middeldorp & Clemens Kool & Stephanie Rosenkranz, 2007. "Listening Without Understanding," Working Papers 07-19, Utrecht School of Economics. [Downloadable!]
  2. Gikas Hardouvelis & Dimitrios Thomakos, 2007. "Consumer Confidence and Elections," Working Papers 0003, University of Peloponnese, Department of Economics. [Downloadable!]
    Other versions:
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