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Naive traders and mispricing in prediction markets

Listed author(s):
  • Serrano-Padial, Ricardo

This paper studies pricing patterns in a speculative market with asymmetric information populated by both sophisticated and naive traders. Three pricing regimes arise in equilibrium: perfect pricing, with prices equalling asset values, partial mispricing and complete mispricing. Perfect pricing obtains when the presence of naive traders is small although not necessarily zero. When the fraction of naive traders is moderate prices are correct for some values but not for others. Finally, complete mispricing typically arises when the presence of naive traders is sufficiently high. Mispricing exhibits a systematic pattern of overpricing low values and underpricing high values.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053112000749
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 5 ()
Pages: 1882-1912

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:5:p:1882-1912
DOI: 10.1016/j.jet.2012.05.020
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, vol. 91(3), pages 425-429, June.
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