Prediction Markets

This interdisciplinary talk will discuss the design, ecology, manipulation, and performance of prediction markets.

Prediction markets are venues for the trading of contracts that reference an event. The contracts have a simple structure—they pay a fixed amount if the referenced event occurs and nothing otherwise. The prices of these contracts (relative to the fixed payment received if the event occurs) are commonly interpreted as probabilities with which the event is predicted to occur. Under this interpretation, prediction market prices can be compared with the outputs of other forecasting mechanisms such as statistical models.

The talk will examine how the forecasting performance of markets relative to models can be evaluated, the incentives for market manipulation to influence beliefs, the distribution of strategies in the trading population, and the historical accuracy of markets relative to alternative mechanisms.