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The Wisdom of a Confused Crowd:Model-Based Inference

Author

Listed:
  • George J. Mailath

    (Department of Economics, University of Pennsylvania)

  • Larry Samuelson

    (Department of Economics, Yale University)

Abstract

“Crowds” are often regarded as “wiser” than individuals, and prediction markets are often regarded as effective methods for harnessing this wisdom. If the agents in prediction markets are Bayesians who share a common model and prior belief, then the no-trade theorem implies that we should see no trade in the market. But if the agents in the market are not Bayesians who share a common model and prior belief, then it is no longer obvious that the market outcome aggregates or conveys information. In this paper, we examine a stylized prediction market comprised of Bayesian agents whose inferences are based on different models of the underlying environment. We explore a basic tension—the differences in models that give rise to the possibility of trade generally preclude the possibility of perfect information aggregation.

Suggested Citation

  • George J. Mailath & Larry Samuelson, 2019. "The Wisdom of a Confused Crowd:Model-Based Inference," PIER Working Paper Archive 19-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:19-001
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    Cited by:

    1. George J. Mailath & Larry Samuelson, 2020. "Learning under Diverse World Views: Model-Based Inference," American Economic Review, American Economic Association, vol. 110(5), pages 1464-1501, May.
    2. Jose Luis Montiel Olea & Pietro Ortoleva & Mallesh M Pai & Andrea Prat, 2019. "Competing Models," Papers 1907.03809, arXiv.org, revised Nov 2021.
    3. Carola Binder & Wesley Janson & Randal J. Verbrugge, 2019. "Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations?," Working Papers 19-15, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Wisdom of the Crowd; Information aggregation; Common prior; NonBayesian updating;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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