# Felix

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```					Prediction Markets

Justin Wolfers and
Eric Zitzewitz
Quality of Predictions

 Political domain
 Markets predict better than polls

 Economic derivatives
 Markets do no better than the “consensus” forecast

2
Why Would Markets Do Better?

 Incentives to produce new information
 Unlikely given the low incentives
 Not even quite clear to what extent traders are
motivated by monetary gains (NFL example)

 Truthful revelation of available information
 Experimental markets in firms

 Superior aggregation of information

3
Superior Aggregation

 Gallup Poll Question: Next, we’d like you to think
about the general election for President to be held
in November. If Vice-President Al Gore were the
Democratic Party’s candidate and Texas Governor
George W. Bush were the Republican Party’s
candidate, who would you be more likely to vote
for?
 A “Gore” answer implies that there is a probability
p>.5 that the person will vote for Gore
 If .6 say they vote for Gore, the fraction who will
vote for Gore lies in the interval [.3,.8]
4
Probabilistic Information

 How likely is it that you will vote in the 2000 election
for President [definitely vote, probably vote,
probably not vote, definitely not vote]?
 What do you think is the percent chance that you
will cast a vote for President?
 72% say they will “definitely vote”
 54% are 100% certain, 10% vote with probability [.91-
.99], 8% with probabilty [.51-.9]

5
Consequences

 Market design
 TradeSports.com offers contract for 2004 Year End
Unemployment Rate to be ON or ABOVE 4.5%

 Probabilistic elicitation
 Much more optimism about the possibility to elicit
probabilistic information
 “early” results indicate good predictive power of
probabilistic information (Nyarko and Schotter, 2002)

6
Questions

 To what extent is the superiority of prediction
markets the result of information that is particularly
difficult to aggregate?

 Are prices market probabilities? (part II)
 Prices do not equal the mean beliefs of traders (Manski,
2004)
 Are (betting) budgets statistically independent of beliefs?

7
Questions II
 What happens if we take prediction markets
seriously?
 We could use markets to predict counterfactuals
 How many soldiers will die in a war
 Which division has the greater chance of success?
 Payoff now depends on the likelihood of predicting the
right outcome plus the likelihood that trading changes
economic consequences
 Manipulation
 Little historic evidence (Rhode and Strumpf, 2004)
 Strategic provision of information
 Unexpected accruals and incentive compensation
(Bergstresser&Phillipon, 2003; Gao&Shrieves, 2003)
8

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