Heterogeneous Beliefs and Prediction Market Accuracy

Xuezhong (Tony) He () and Nicolas Treich

No 13-394, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We consider a prediction market in which traders have heterogeneous prior beliefs in probabilities. In the two-state case, we derive necessary and sufficient conditions so that the prediction market is accurate in the sense that the equilibrium state price equals the mean probabilities of traders' beliefs. We also provide a necessary and sufficient condition for the well documented favorite-longshot bias. In an extension to many states, we revisit the results of Varian (1985) on the relationship between equilibrium state price and belief heterogeneity.

Keywords: Prediction market; heterogeneous beliefs; risk aversion; favorite-longshot bias; complete markets; and asset prices (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-for, nep-mic and nep-upt
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Heterogeneous Beliefs and Prediction Market Accuracy (2013)
Working Paper: Heterogeneous Beliefs and Prediction Market Accuracy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:27155

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