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Do Prediction Markets Aid Defenders in a Weak-Link Contest?

Author

Listed:
  • Cary Deck

    (Department of Economics, University of Arkansas and Economic Science Institute, Chapman University)

  • Li Hao

    (Department of Economics, University of Arkansas)

  • David Porter

    (Economic Science Institute, Chapman University)

Abstract

Laboratory experiments have demonstrated that prediction market prices weakly aggregate the disparate information of the traders about states (moves) of nature. However, in many practical applications one might want to predict the move of a strategic participant. This is particularly important in aggressor-defender contests. This paper reports a set of such experiments where the defender may have the advantage of observing a prediction market on the aggressor’s action. The results of the experiments indicate that: the use of prediction markets does not increase the defender’s win rate; prediction markets contain reliable information regarding aggressors’ decisions, namely excess bid information, that is not being exploited by defenders; and the existence of a prediction market alters the behavior of the aggressor whose behavior is being forecast.

Suggested Citation

  • Cary Deck & Li Hao & David Porter, 2013. "Do Prediction Markets Aid Defenders in a Weak-Link Contest?," Working Papers 13-27, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:13-27
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    More about this item

    Keywords

    Information Aggregation; Prediction Markets; Weak-Link Contests; Colonel Blotto;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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