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Prediction Markets in the Laboratory

  • Cary Deck

    (University of Arkansas & Chapman University)

  • David Porter


    (Economic Science Institute, Chapman University)

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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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-05.

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Length: 33 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:chu:wpaper:13-05
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  1. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August.
  2. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 449-459, August.
  3. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, vol. 91(3), pages 425-429, June.
  4. 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.
  5. Carsten Schmidt & Jan Hansen & Martin Strobel, 2004. "Manipulation in political stock markets - preconditions and evidence," Natural Field Experiments 00265, The Field Experiments Website.
  6. Vernon L. Smith, 1994. "Economics in the Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 113-131, Winter.
  7. Paul J. Healy & Sera Linardi & J. Richard Lowery & John O. Ledyard, 2010. "Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders," Management Science, INFORMS, vol. 56(11), pages 1977-1996, November.
  8. 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.
  9. Charles Noussair & Steven Tucker, 2006. "Futures Markets And Bubble Formation In Experimental Asset Markets ," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 167-184, 06.
  10. Helena Veiga & Marc Vorsatz, 2010. "Information aggregation in experimental asset markets in the presence of a manipulator," Experimental Economics, Springer, vol. 13(4), pages 379-398, December.
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