Working Paper: NBER ID: w12083
Authors: Justin Wolfers; Eric Zitzewitz
Abstract: Prediction Markets, sometimes referred to as "information markets," "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.
Keywords: Prediction Markets; Information Markets; Event Futures; Forecasting
JEL Codes: C53; D8; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading profits (F19) | information gathering (C80) |
| information flow (D83) | market price adjustments (D49) |
| prediction market prices (G13) | aggregated beliefs (D80) |
| traders' beliefs (D84) | prediction market prices (G13) |
| incentives (M52) | truthful trading (F13) |