Public Information Bias and Prediction Market Accuracy

Thomas Gruca and Joyce Berg

Journal of Prediction Markets, 2007, vol. 1, issue 3, pages 219-231

Abstract: How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.

Keywords: PREDICTION MARKETS; INFORMATION AGGREGATION; ELECTION FORECASTING; PUBLIC INFORMATION (search for similar items in EconPapers)
Date: 2007

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