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Agent-Based Modeling of the Prediction Markets

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  • Tongkui Yu
  • Shu-Heng Chen

Abstract

We propose a simple agent-based model of the political election prediction market which reflects the intrinsic feature of the prediction market as an information aggregation mechanism. Each agent has a vote, and all agents’ votes determine the election result. Some of the agents participate in the prediction market. Agents form their beliefs by observing their neighbors’ voting disposition, and trade with these beliefs by following some forms of the zero-intelligence strategy. In this model, the mean price of the market is used as a forecast of the election result. We study the effect of the radius of agents’ neighborhood and the geographical distribution of information on the prediction accuracy. In addition, we also identify one of the mechanisms which can replicate the favorite-longshot bias, a stylized fact in the prediction market. This model can then provide a framework for further analysis on the prediction market when market participants have more sophisticated trading behavior.

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Bibliographic Info

Paper provided by ASSRU - Algorithmic Social Science Research Unit in its series ASSRU Discussion Papers with number 1119.

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Date of creation: 2011
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Handle: RePEc:trn:utwpas:1119

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Keywords: Prediction market; Agent-based simulation; Information aggregation mechanism; Prediction accuracy; Zero-intelligence agents; Favorite-longshot bias;

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  1. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CESifo Working Paper Series 3029, CESifo Group Munich.
  2. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers 03-025, Stanford Institute for Economic Policy Research.
  3. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting Prediction Market Prices as Probabilities," NBER Working Papers 12200, National Bureau of Economic Research, Inc.
  4. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
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