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Key Design Elements of Prediction Markets

In: Prediction Markets

Author

Listed:
  • Stefan Luckner
  • Jan Schröder
  • Christian Slamka
  • Markus Franke
  • Andreas Geyer-Schulz
  • Bernd Skiera
  • Martin Spann
  • Christof Weinhardt

Abstract

Before studying more advanced applications of prediction markets, it is necessary to gain a basic understanding of their key design elements. Like any market, prediction markets have to be designed and implemented very carefully in order to ensure that they are suitable for aggregating traders’ information (Weinhardt et al., 2003, Weinhardt et al., 2006a). The key design elements comprise the specification of contractstraded in a prediction market, the trading mechanism, and the incentivesprovided to ensure information revelation (Spann and Skiera, 2003). Moreover, diversity of information is required in order to provide a basis for trading (Wolfers and Zitzewitz, 2004). Heterogeneous expectations about the future among traders are desirable and the selection of tradersis thus also considered a key design issue (Tziralis and Tatsiopoulos, 2007b). The following subsections describe these design elements in more detail.

Suggested Citation

  • Stefan Luckner & Jan Schröder & Christian Slamka & Markus Franke & Andreas Geyer-Schulz & Bernd Skiera & Martin Spann & Christof Weinhardt, 2012. "Key Design Elements of Prediction Markets," Springer Books, in: Prediction Markets, chapter 3, pages 11-47, Springer.
    • Handle: RePEc:spr:sprchp:978-3-8349-7085-5_3
    DOI: 10.1007/978-3-8349-7085-5_3
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