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Heterogeneous Beliefs and Prediction Market Accuracy

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  • He, Xue-Zhong
  • Treich, Nicolas

Abstract

We consider a prediction market in which traders have heterogeneous prior beliefs in probabilities. In the two-state case, we derive necessary and sufficient conditions so that the prediction market is accurate in the sense that the equilibrium state price equals the mean probabilities of traders' beliefs. We also provide a necessary and sufficient condition for the well documented favorite-longshot bias. In an extension to many states, we revisit the results of Varian (1985) on the relationship between equilibrium state price and belief heterogeneity.

Suggested Citation

  • He, Xue-Zhong & Treich, Nicolas, 2012. "Heterogeneous Beliefs and Prediction Market Accuracy," TSE Working Papers 13-394, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:27155
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    References listed on IDEAS

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    Cited by:

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    2. Antonio, Filippin & Marco, Mantovani, 2019. "Risk Aversion and Information Aggregation in Asset Markets," Working Papers 404, University of Milano-Bicocca, Department of Economics, revised Apr 2019.

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    Keywords

    Prediction market; heterogeneous beliefs; risk aversion; favorite-longshot bias; complete markets; and asset prices;
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