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Do prediction markets aid defenders in a weak-link contest?

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  • Deck, Cary
  • Hao, Li
  • Porter, David

Abstract

Laboratory experiments have demonstrated that prediction market prices weakly aggregate the disparate information of the traders about states (moves) of nature. However, in many practical applications one is attempting to predict the move of a strategic rival. This is particularly important in aggressor–defender contests. This paper reports an experiment where the defender may have the advantage of observing a prediction market on the aggressor's action. The results of the experiments indicate that: the use of prediction markets does not increase the defender's win rate; prediction markets contain reliable information regarding aggressors’ decisions that is not being exploited by defenders; and the existence of a prediction market does not alter the behavior of the aggressor whose behavior is being forecast.

Suggested Citation

  • Deck, Cary & Hao, Li & Porter, David, 2015. "Do prediction markets aid defenders in a weak-link contest?," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 248-258.
  • Handle: RePEc:eee:jeborg:v:117:y:2015:i:c:p:248-258
    DOI: 10.1016/j.jebo.2015.06.019
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    More about this item

    Keywords

    Information aggregation; Prediction markets; Weak-link contests; Colonel Blotto;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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