Agent-Based Modeling of the Prediction Markets

Tongkui Yu () and Shu-Heng Chen

No 1119, ASSRU Discussion Papers from ASSRU - Algorithmic Social Science Research Unit

Abstract: We propose a simple agent-based model of the political election prediction market which reflects the intrinsic feature of the prediction market as an information aggregation mechanism. Each agent has a vote, and all agents’ votes determine the election result. Some of the agents participate in the prediction market. Agents form their beliefs by observing their neighbors’ voting disposition, and trade with these beliefs by following some forms of the zero-intelligence strategy. In this model, the mean price of the market is used as a forecast of the election result. We study the effect of the radius of agents’ neighborhood and the geographical distribution of information on the prediction accuracy. In addition, we also identify one of the mechanisms which can replicate the favorite-longshot bias, a stylized fact in the prediction market. This model can then provide a framework for further analysis on the prediction market when market participants have more sophisticated trading behavior.

Keywords: Prediction market; Agent-based simulation; Information aggregation mechanism; Prediction accuracy; Zero-intelligence agents; Favorite-longshot bias (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cmp, nep-for, nep-gth and nep-hme
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