Prediction Markets in the Laboratory
The idea that there is wisdom from the collective has been forcefully described in “The Wisdom of the Crowds” by James Surowiecki, who argues that the aggregation of information in groups results in better decisions than those that are afforded by any single member of the group. Markets, like opinion polls, are one mechanism for aggregating disparate pieces of information. The aggregation properties of prices were first noted by Hayek (1945) and were formally examined by Muth (1961). In particular, Hayek argues that market prices serve the purpose of sharing and coordinating local and personal knowledge, while Muth shows that markets do not waste information and that the current price contains all the information available from market participants.
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- Graefe, Andreas & Armstrong, J. Scott, 2011. "Comparing face-to-face meetings, nominal groups, Delphi and prediction markets on an estimation task," International Journal of Forecasting, Elsevier, vol. 27(1), pages 183-195, January.
- Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-97, December.
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