Affecting Policy by Manipulating Prediction Markets: Experimental Evidence

Documented results indicate prediction markets effectively aggregate information and form accurate predictions. This has led to a proliferation of markets predicting everything from the results of elections to a company’s sales to movie box office receipts. Recent research suggests prediction markets are robust to manipulation attacks and resulting market outcomes improve forecast accuracy. However, we present evidence from the lab indicating that well funded, single minded manipulators can in fact destroy a prediction market’s ability to aggregate information. Our results clearly indicate that the usefulness of prediction markets as inputs to decision making may be limited.Information Aggregation, Prediction Markets, Manipulation

Prediction Markets in Theory and Practice

Prediction Markets, sometimes referred to as "information markets," "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.

Five Open Questions About Prediction Markets

Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management -- in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.

Five open questions about prediction markets

Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decisionmaking and risk management--in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.Forecasting ; Financial markets ; Econometric models

Decision Markets for Policy Advice

The main cause of bad policy decisions is arguably a lack of information. Decisionmakers often do not make use of relevant information about the consequences of the policies they choose. The problem, however, is not simply that public officials do not exploit readily available information. It is also that they do not take full advantage of creative mechanisms that could expand the supply of policy-relevant information. Among the most innovative and potentially useful information-generating mechanisms are speculative markets. Speculative markets produce public information about the perceived likelihood of future events as a natural byproduct of voluntary exchange. Speculative markets do a remarkable job of aggregating information; in every head-to-head field comparison made so far, their forecasts have been at least as accurate as those of competing institutions, such as official government estimates. Many organizations are now trying to take advantage of this effect, experimenting with the creation of "prediction markets" or "information markets," to forecast future events such as product sales and project completion dates. This chapter examines the uses and limitations of decision markets. Decision markets are information markets designed to inform a particular policy decision, by directly estimating relevant consequences of that decision. After reviewing the weaknesses of existing institutions, the mechanics of decision markets, and a concrete example, this chapter reviews the requirements, advantages, and disadvantages of decision markets. The chapter also takes a close look at a particular application of this tool: the controversial yet illuminating attempt to establish a "Policy Analysis Market" to forecast the consequences of major policy U.S. choices in the Middle East.

Partition-dependent framing effects in lab and field prediction markets

Many psychology experiments show that individually judged probabilities of the same event can vary depending on the partition of the state space (a framing effect called "partition-dependence"). We show that these biases transfer to competitive prediction markets in which multiple informed traders are provided economic incentives to bet on their beliefs about events. We report results of a short controlled lab study, a longer field experiment (betting on the NBA playoffs and the FIFA World Cup), and naturally-occurring trading in macro-economic derivatives. The combined evidence suggests that partition-dependence can exist and persist in lab and field prediction markets

Reconsidering the relation between regret and responsibility

decision making;consumer behavior

"Wow, I could've had a V8!": The role of regret in consumer choice

decision making;consumer behavior;regret theory