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Information (In)Efficiency in Prediction Markets

Snowberg, Erik and Wolfers, Justin and Zitzewitz, Eric (2005) Information (In)Efficiency in Prediction Markets. In: Information Efficiency in Financial and Betting Markets. Cambridge University Press , Cambridge, pp. 366-386. ISBN 9780511127816.

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We analyze the extent to which simple markets can be used to aggregate dispersed information into efficient forecasts of unknown future events. From the examination of case studies in a variety of financial settings we enumerate and suggest solutions to various pitfalls of these simple markets. Despite the potential problems, we show that market-generated forecasts are typically fairly accurate in a variety of prediction contexts, and that they outperform most moderately sophisticated benchmarks. We also show how conditional contracts can be used to discover the markets belief about correlations between events, and how with further assumptions these correlations can be used to make decisions.

Item Type:Book Section
Additional Information:© 2005 Cambridge University Press.
Record Number:CaltechAUTHORS:20120605-092905961
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:31809
Deposited By: Tony Diaz
Deposited On:08 Jun 2012 20:25
Last Modified:03 Oct 2019 03:55

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