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The Effects of Prediction Market Design and Price Elasticity on Trading Performance of Users: An Experimental Analysis

  • Ivo Blohm
  • Christoph Riedl
  • Johann F\"uller
  • Orhan K\"oroglu
  • Jan Marco Leimeister
  • Helmut Krcmar

We employ a 2x3 factorial experiment to study two central factors in the design of prediction markets (PMs) for idea evaluation: the overall design of the PM, and the elasticity of market prices set by a market maker. The results show that 'multi-market designs' on which each contract is traded on a separate PM lead to significantly higher trading performance than 'single-markets' that handle all contracts one on PM. Price elasticity has no direct effect on trading performance, but a significant interaction effect with market design implies that the performance difference between the market designs is highest in settings of moderate price elasticity. We contribute to the emerging research stream of PM design through an unprecedented experiment which compares current market designs.

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File URL: http://arxiv.org/pdf/1204.3457
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Paper provided by arXiv.org in its series Papers with number 1204.3457.

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Date of creation: Apr 2012
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Handle: RePEc:arx:papers:1204.3457
Contact details of provider: Web page: http://arxiv.org/

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  1. Beardsley, George & Mansfield, Edwin, 1978. "A Note on the Accuracy of Industrial Forecasts of the Profitability of New Products and Processes," The Journal of Business, University of Chicago Press, vol. 51(1), pages 127-35, January.
  2. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers 03-025, Stanford Institute for Economic Policy Research.
  3. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2010. "Idea Generation and the Quality of the Best Idea," Management Science, INFORMS, vol. 56(4), pages 591-605, April.
  4. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," NBER Working Papers 15923, National Bureau of Economic Research, Inc.
  5. repec:reg:rpubli:259 is not listed on IDEAS
  6. Christian Slamka & Wolfgang Jank & Bernd Skiera, 2012. "Secondā€Generation Prediction Markets for Information Aggregation: A Comparison of Payoff Mechanisms," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(6), pages 469-489, 09.
  7. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  8. Henry Berg & Todd A. Proebsting, 2009. "Hanson's Automated Market Maker," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 45-59, April.
  9. Stefan Luckner & Christof Weinhardt, 2007. "How to Pay Traders in Information Markets: Results from a Field Experiment," Journal of Prediction Markets, University of Buckingham Press, vol. 1(2), pages 147-156, July.
  10. Armstrong, J. Scott & Collopy, Fred, 1992. "Error measures for generalizing about forecasting methods: Empirical comparisons," International Journal of Forecasting, Elsevier, vol. 8(1), pages 69-80, June.
  11. Gerrit Kamp & Peter Koen, 2009. "Improving the Idea Screening Process within Organizations using Prediction Markets: A Theoretical Perspective," Journal of Prediction Markets, University of Buckingham Press, vol. 3(2), pages 39-64, August.
  12. Franke, Nikolaus & Shah, Sonali, 2003. "How communities support innovative activities: an exploration of assistance and sharing among end-users," Research Policy, Elsevier, vol. 32(1), pages 157-178, January.
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