Jul 10, 2012

Prediction markets

Snowberg, Wolfers, and Zitzewitz have a new paper on prediction markets (July 2012):
Prediction markets—markets used to forecast future events—have been used to accurately forecast the outcome of political contests, sporting events, and, occasionally, economic outcomes. This chapter summarizes the latest research on prediction markets in order to further their utilization by economic forecasters. We show that prediction markets have a number of attractive features: they quickly incorporate new information, are largely efficient, and impervious to manipulation. Moreover, markets generally exhibit lower statistical errors than professional forecasters and polls. Finally, we show how markets can be used to both uncover the economic model behind forecasts, as well as test existing economic models.
In 2003 Wolfers and Zitzewitz wrote:
We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of uncertain future events. Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks. Carefully designed contracts can yield insight into the market’s expectations about probabilities, means and medians, and also uncertainty about these parameters. Moreover, conditional markets can effectively reveal the market’s beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation. We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful.
It seems that the discussion on prediction markets has't advanced much since 2003. A search in Google Trends of "prediction markets" indicates that in 2008 the topic was really hot. On the other hand, a search in Google Scholar indicates that there is an ongoing active research on the topic
The wikipedia entry is very informative and don't miss this paper

No comments:

Post a Comment