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Prediction Markets in Theory and Practice

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Author Info
Justin Wolfers
Eric Zitzewitz

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12083.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12083

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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

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. 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.
  2. Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Justin Wolfers & Eric Zitzewitz, 2006. "Five Open Questions About Prediction Markets," NBER Working Papers 12060, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Justin Wolfers & Eric Zitzewitz, 2004. "Experimental Political Betting Markets and the 2004 Election," The Economists' Voice, Berkeley Electronic Press, vol. 1(2), pages 1. [Downloadable!]
  5. 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)
  6. 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!]
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  7. 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!]
  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. [Downloadable!] (restricted)
  9. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 107-126, Spring. [Downloadable!] (restricted)
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  10. 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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  11. 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!]
  12. Robin Hanson, 2006. "Designing real terrorism futures," Public Choice, Springer, vol. 128(1), pages 257-274, July. [Downloadable!] (restricted)
  13. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  14. 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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  15. Refet S. Gürkaynak & Justin Wolfers, 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). [Downloadable!]
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  16. 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)
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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!]
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