Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders

Double auction prediction markets have proven successful in large-scale applications such as elections and sporting events. Consequently, several large corporations have adopted these markets for smaller-scale internal applications where information may be complex and the number of traders is small. Using laboratory experiments, we test the performance of the double auction in complex environments with few traders and compare it to three alternative mechanisms. When information is complex we find that an iterated poll (or Delphi method) outperforms the double auction mechanism. We present five behavioral observations that may explain why the poll performs better in these settings

Testing for efficiency in the New Zealand horse racetrack betting market a thesis in partial fulfilment of the requirements for the degree of Master of Applied Economics at Massey University

Using a large sample of New Zealand pari-mutuel horse race betting data, this study tests for market efficiency. This involves testing for weak form efficiency and an anomaly known as the favourite longshot bias. Additionally, a test developed by Henery (1985) is used to examine the extent to which bettors discount their losses. Also, two utility' estimations are calculated using the first three moments surrounding the distribution. Each test is performed twice, firstly with the odds at the close of the tote and secondly with the odds quoted 30 minutes before the tote closes. A number of previous studies are reviewed. The data set is discussed along with its limitations. An extensive description of the research methodology' is presented, followed by the results, interpretations and discussion. Many former studies have found that racetrack betting is not weak form efficient, but instead there exists a negative risk-return trade-off in the market. This study, exhibiting the negative risk-return trade-off and the favourite longshot bias, is consistent with previous studies. Using opening odds, there is much evidence to suggest that the favourite longshot bias exists 30 minutes before the tote closes but is essentially eliminated in the final 30 minutes of betting. The estimation of Henery's test is consistent with his results that bettors discount approximately 2% of their losses as 'not typical'. The implications of this are also discussed. The estimation of bettor's utility' functions shows that bettors are risk lovers and, contrary' to one study, the inclusion of the third moment is insufficient to prove bettors are in fact risk averse

SP Betting as a Self-Enforcing Implicit Cartel

A large share of the UK off-course horse racing betting market involves winning payouts determined at Starting Prices (SP). This implies that gamblers can bet with off-course bookies on any horse before a race at the final pre-race odds as set by on-course bookies for that horse. Given the oligopolistic structure of the off-course gambling market in the UK, a market that is dominated by a small number of large bookmaking firms, we study the phenomenon of SP as a type of self-enforcing implicit collusion. We show that given the uncertainty about a race outcome, and their ability to influence the prices set by on-course bookies, agreeing to lay bets at SP is superior for off-course bookies as compared with offering fixed odds. We thus extend the results of Rotemberg and Saloner (1990) to markets with uncertainty about both demand and outcomes, We test our model by studying the predicted effects of SP betting on the behavior of on-course bookies. Using data drawn from both the UK and Australian on-course betting markets, we show that the differences between these markets are consistent with the predicted effects of SP betting in the UK off-course market and its absence from the Australian market.

Generalising the pari-mutuel model

We introduce two models for imprecise probabilities which generalise the Pari-Mutuel Model while retaining its simple structure. Their consistency properties are investigated, as well as their capability of formalising an assessor\u2019s different attitudes. It turns out that one model is always coherent, while the other is (occasionally coherent but) generally only 2-coherent, and may elicit a conflicting attitude towards risk

Special Cases

International audienceThis chapter reviews special cases of lower previsions, that are instrumental in practical applications. We emphasize their various advantages and drawbacks, as well as the kind of problems in which they can be the most useful