Working Paper: CEPR ID: DP5562
Authors: Justin Wolfers; Eric Zitzewitz
Abstract: Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management - in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.
Keywords: event futures; information markets; instrumental variables; market manipulation; prediction IV; prediction markets
JEL Codes: C9; D7; D8; G1; M2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Attracting uninformed traders (G19) | Market success (L17) |
| Trader motivations (G11) | Market liquidity (G19) |
| Manipulation of market prices (G13) | Reliability of prediction markets (G17) |
| Calibration of markets on small probabilities (G19) | Mispricing in low-probability events (G19) |
| Behavioral biases (D91) | Mispricing in low-probability events (G19) |
| Transaction costs (D23) | Prediction market outcomes (D79) |
| Informed trading (G14) | Prediction market outcomes (D79) |
| Behavioral biases (D91) | Market inefficiencies (G14) |