Can Manipulators Mislead Prediction Market Observers?

Abstract

We study experimental markets where privately informed traders exchange simple assets, and where uninformed third parties are asked to forecast the values of these assets, guided only by market prices. Although prices only partially aggregate information, they significantly improve the forecasts of third parties. In a second treatment, a portion of traders are given preferences over the forecasts made by observers. Although we find evidence that these traders attempt to manipulate prices in order to influence the beliefs of observers, we find no evidence that observers make less accurate forecasts as a result.