Public Information Bias and Prediction Market Accuracy

Authors: Gruca, Thomas S.; Berg, Joyce E.

Source: The Journal of Prediction Markets, Volume 1, Number 3, December 2007 , pp. 219-231(13)

Publisher: University of Buckingham Press

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Abstract:

How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.

Keywords: PREDICTION MARKETS; INFORMATION AGGREGATION; ELECTION FORECASTING; PUBLIC INFORMATION

Document Type: Research article

Publication date: 2007-12-01

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