IDEAS home Printed from
   My bibliography  Save this article

The Effect of Contract Structure on Prediction Market Price Biases


  • Richard Borghesi


Prediction markets add value when they produce unbiased forecasts. However, several prior studies find persistent biases when examining prediction market sides contracts. Sides contracts represent bets on whether the score differential between two teams in a contest will be greater or less than a stated value. We propose that inferences generated from examining Tradesports' sides contracts may be problematic because they are framed exclusively with respect to favorites. If a favorite-longshot (or reverse favorite-longshot) bias causes these deviations from rationality, it may be that non-sports-related (e.g., internal corporate) prediction markets assets do not suffer from the same shortcomings. To evaluate the generalizability of prior findings, we contrast the price efficiency of Tradesports' sides and totals contracts. In totals wagers, traders take a position on whether the combine score of both teams in a game will be above or below a stated value. We find that the fundamental structural differences between totals contracts and sides contracts partly determine differences in price efficiencies. Relative to those in the sides market, some price biases in the totals market are significantly smaller in magnitude, and others are absent altogether. Results indicate that contract structure plays a significant role in the ability of prediction markets to produce unbiased estimates.

Suggested Citation

  • Richard Borghesi, 2009. "The Effect of Contract Structure on Prediction Market Price Biases," Journal of Prediction Markets, University of Buckingham Press, vol. 3(3), pages 1-12, December.
  • Handle: RePEc:buc:jpredm:v:3:y:2009:i:3:p:1-12

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
    2. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    3. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
    4. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-1059, July.
    5. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-971, July.
    6. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    7. Justin Wolfers, 2006. "Point Shaving: Corruption in NCAA Basketball," American Economic Review, American Economic Association, vol. 96(2), pages 279-283, May.
    8. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
    9. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
    10. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-1254, October.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:buc:jpredm:v:3:y:2009:i:3:p:1-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.