Interpreting the Predictions of Prediction Markets

Charles Manski

No 10359, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Participants in prediction markets such as the Iowa Electronic Markets trade all-or-nothing contracts that pay a dollar if and only if specified future events occur. Researchers engaged in empirical study of prediction markets have argued broadly that equilibrium prices of the contracts traded are market probabilities' that the specified events will occur. This paper shows that if traders are risk-neutral price takers with heterogenous beliefs, the price of a contract in a prediction market reveals nothing about the dispersion of traders' beliefs and partially identifies the central tendency of beliefs. Most persons have beliefs higher than price when price is above 0.5, and most have beliefs lower than price when price is below 0.5. The mean belief of traders lies in an interval whose midpoint is the equilibrium price. These findings persist even if traders use price data to revise their beliefs in plausible ways.

JEL-codes: D84 G10 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-mic
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Citations: View citations in EconPapers (34)

Published as Manski, Charles F. "Interpreting the Predictions of Prediction Markets." Economics Letters 91, 3 (June 2006): 425-29.

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Journal Article: Interpreting the predictions of prediction markets (2006)
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