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Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders

Healy, Paul J. and Linardi, Sera and Lowery, J. Richard and Ledyard, John O. (2010) Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders. Management Science, 56 (11). pp. 1977-1996. ISSN 0025-1909. doi:10.1287/mnsc.1100.1226.

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Double auction prediction markets have proven successful in large-scale applications such as elections and sporting events. Consequently, several large corporations have adopted these markets for smaller-scale internal applications where information may be complex and the number of traders is small. Using laboratory experiments, we test the performance of the double auction in complex environments with few traders and compare it to three alternative mechanisms. When information is complex we find that an iterated poll (or Delphi method) outperforms the double auction mechanism. We present five behavioral observations that may explain why the poll performs better in these settings.

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Additional Information:© 2010 INFORMS. Received July 23, 2009; accepted June 14, 2010, by Teck-Hua Ho, decision analysis. Published online in Articles in Advance October 11, 2010. This work was partially supported by National Science Foundation Grant SES-0847406. The authors thank Rachel Croson, Catherine Eckel, John Fountain, Rick Green, Joel Grus, Glenn Harrison, Ernan Haruvy, Shimon Kogan, Tony Kwasnica, Sherry Li, Bryan Routledge, Justin Wolfers, an associate editor, and two anonymous referees for their helpful comments and conversations. Ines Fiorelli and Andrej Svorencik provided useful research assistance.
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Subject Keywords:information aggregation; prediction markets; mechanism design
Issue or Number:11
Record Number:CaltechAUTHORS:20101206-154545200
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Official Citation:Healy, P. J., S. Linardi, et al. (2010). "Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders." MANAGEMENT SCIENCE 56(11): 1977-1996.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:21201
Deposited By: Tony Diaz
Deposited On:14 Dec 2010 00:29
Last Modified:09 Nov 2021 00:06

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