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Prediction market accuracy in the long run

  • Berg, Joyce E.
  • Nelson, Forrest D.
  • Rietz, Thomas A.
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    "Prediction markets" are designed specifically to forecast events such as elections. Though election prediction markets have been being conducted for almost twenty years, to date nearly all of the evidence on efficiency compares election eve forecasts with final pre-election polls and actual outcomes. Here, we present evidence that prediction markets outperform polls for longer horizons. We gather national polls for the 1988 through 2004 U.S. Presidential elections and ask whether either the poll or a contemporaneous Iowa Electronic Markets vote-share market prediction is closer to the eventual outcome for the two-major-party vote split. We compare market predictions to 964 polls over the five Presidential elections since 1988. The market is closer to the eventual outcome 74% of the time. Further, the market significantly outperforms the polls in every election when forecasting more than 100Â days in advance.

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    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 24 (2008)
    Issue (Month): 2 ()
    Pages: 285-300

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    Handle: RePEc:eee:intfor:v:24:y:2008:i:2:p:285-300
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    1. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers 03-025, Stanford Institute for Economic Policy Research.
    2. Forsythe, Robert & Rietz, Thomas A. & Ross, Thomas W., 1999. "Wishes, expectations and actions: a survey on price formation in election stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 39(1), pages 83-110, May.
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    4. Fair, Ray C, 1978. "The Effect of Economic Events on Votes for President," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 159-73, May.
    5. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    6. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-61, December.
    7. Kenneth Oliven & Thomas A. Rietz, 2004. "Suckers Are Born but Markets Are Made: Individual Rationality, Arbitrage, and Market Efficiency on an Electronic Futures Market," Management Science, INFORMS, vol. 50(3), pages 336-351, March.
    8. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters, in: Regional Climate Change and Variability, chapter 1 Edward Elgar.
    9. Jones, Randall J. & Armstrong, J. Scott & Cuzan, Alfred G., 2007. "Forecasting elections using expert surveys: an application to U.S. presidential elections," MPRA Paper 5301, University Library of Munich, Germany.
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