Risk Aversion, Beliefs, and Prediction Market Equilibrium
Manski  analyzes the relationship between the distribution of traders’ beliefs and the equilibrium price in a prediction market with risk neutral traders. He finds that there can be a substantial difference between the mean belief that an event will occur, and the price of an asset that pays one dollar if the event occurs and otherwise pays nothing. This result is puzzling, since these markets frequently produce excellent predictions. This paper resolves the apparent puzzle by demonstrating that both risk aversion and the distribution of traders’ beliefs significantly affect the equilibrium price. For coeffcients of relative risk aversion near those estimated in empirical studies and for plausible belief distributions, the equilibrium price is very near the traders’ mean belief.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Manski, Charles F., 2006.
"Interpreting the predictions of prediction markets,"
Elsevier, vol. 91(3), pages 425-429, June.
- Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Charles R. Plott & Jorgen Wit & Winston C. Yang, 2003. "Parimutuel betting markets as information aggregation devices: experimental results," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 311-351, 09.
- Plott, Charles R. & Wit, J. & Yang, W. C., 1997. "Parimutuel Betting Markets as Information Aggregation Devises: Experimental Results," Working Papers 986, California Institute of Technology, Division of the Humanities and Social Sciences.
- Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-1161, December.
- Yaw Nyarko & Andrew Schotter, 2002. "An Experimental Study of Belief Learning Using Elicited Beliefs," Econometrica, Econometric Society, vol. 70(3), pages 971-1005, May.
- Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpmi:0411002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.