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Pari-Mutuel Information Aggregation Mechanisms with Public Knowledge

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  • Jared Bullen
  • Jordi McKenzie

Abstract

A number of experimental studies have found that pari-mutuel markets possess the ability to aggregate information privately held by individuals and therefore act as prediction markets. However, all previous studies have assumed that information is privately and independently distributed. In real world environments the distribution of information is unlikely to take this form. This paper investigates, experimentally, an information structure in which there is both private and public information. It is found that this structure induces a 'public knowledge bias' which limits the market's ability to aggregate information to the extent that the public information reduces the market's predictive performance.

Suggested Citation

  • Jared Bullen & Jordi McKenzie, 2010. "Pari-Mutuel Information Aggregation Mechanisms with Public Knowledge," Journal of Prediction Markets, University of Buckingham Press, vol. 4(2), pages 23-43, September.
  • Handle: RePEc:buc:jpredm:v:4:y:2010:i:2:p:23-43
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    1. Pankaj Sinha & Archit Johar, 2010. "Hedging Greeks for a Portfolio of Options Using Linear and Quadratic Programming," Journal of Prediction Markets, University of Buckingham Press, vol. 4(1), pages 17-26, May.
    2. Papahristodoulou, Christos, 2004. "Option strategies with linear programming," European Journal of Operational Research, Elsevier, vol. 157(1), pages 246-256, August.
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