Interpreting Prediction Market Prices as Probabilities

Justin Wolfers and Eric Zitzewitz

No 2092, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.

Keywords: information market; event future; options; futures; Manski; binary option (search for similar items in EconPapers)
JEL-codes: D4 D8 G13 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (75)

Published - published in: Robert Hahn and Paul Tetlock (eds), Information Markets: A New Way of Making Decisions in the Public and Private Sectors, AEI-Brookings Press, 2006

Downloads: (external link)
https://docs.iza.org/dp2092.pdf (application/pdf)

Related works:
Working Paper: Interpreting Prediction Market Prices as Probabilities (2006)
Working Paper: Interpreting prediction market prices as probabilities (2006)
Working Paper: Interpreting Prediction Market Prices as Probabilities (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp2092

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().