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Public Information Bias and Prediction Market Accuracy

Author

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  • Thomas S. Gruca
  • Joyce E. Berg

Abstract

How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.

Suggested Citation

  • Thomas S. Gruca & Joyce E. Berg, 2007. "Public Information Bias and Prediction Market Accuracy," Journal of Prediction Markets, University of Buckingham Press, vol. 1(3), pages 219-231, December.
    • Handle: RePEc:buc:jpredm:v:1:y:2007:i:3:p:219-231
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    Citations

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    Cited by:

    1. Smith, Michael A. & Paton, David & Williams, Leighton Vaughan, 2009. "Do bookmakers possess superior skills to bettors in predicting outcomes?," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 539-549, August.
    2. Patrick Buckley & Fergal O’Brien, 0. "The effect of malicious manipulations on prediction market accuracy," Information Systems Frontiers, Springer, vol. 0, pages 1-13.
    3. Lennart Sjöberg, 2009. "Are all crowds equally wise? a comparison of political election forecasts by experts and the public," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(1), pages 1-18.
    4. Buckley, Patrick, 2016. "Harnessing the wisdom of crowds: Decision spaces for prediction markets," Business Horizons, Elsevier, vol. 59(1), pages 85-94.
    5. Patrick Buckley & Fergal O’Brien, 2017. "The effect of malicious manipulations on prediction market accuracy," Information Systems Frontiers, Springer, vol. 19(3), pages 611-623, June.

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