Aggregation and manipulation in prediction markets: effects of trading mechanism and information distribution.
ABSTRACT We conduct laboratory experiments on variants of market scoring rule prediction markets, under different information distribution patterns, in order to evaluate the efficiency and speed of information aggregation, as well as test recent theoretical results on manipulative behavior by traders. We find that markets structured to have a fixed sequence of trades exhibit greater accuracy of information aggregation than the typical form that has unstructured trade. In comparing two commonly used mechanisms, we find no significant difference between the performance of the direct probability-report form and the indirect security-trading form of the market scoring rule. In the case of the markets with a structured order, we find evidence supporting the theoretical prediction that information aggregation is slower when information is complementary. In structured markets, the theoretical prediction that there will be more delayed trading in complementary markets is supported, but we find no support for the prediction that there will be more bluffing in complementary markets. However, the theoretical predictions are not borne out in the unstructured markets.
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ABSTRACT: The primary goal of a prediction market is to elicit and aggregate information about some future event of interest. How well this goal is achieved depends on the behavior of self-interested market participants, which are crucially influenced by not only their private information but also their knowledge of others' private information, in other words, the information structure of market participants. In this paper, we model a prediction market using the now-classic logarithmic market scoring rule (LMSR) market maker as an extensive-form Bayesian game and aim to understand and characterize the game-theoretic equilibria of the market for different information structures. Prior work has shown that when participants' information is independent conditioned on the realized outcome of the event, the only type of equilibria in this setting has every participant race to honestly reveal their private information as soon as possible, which is the most desirable outcome for the market's goal of information aggregation. This paper considers the remaining two classes of information structures: participants' information being unconditionally independent (the I game) and participants' information being both conditionally and unconditionally dependent (the D game). We characterize the unique family of equilibria for the I game with finite number of participants and finite stages. At any equilibrium in this family, if player i's last stage of participation in the market is after player j's, player i only reveals his information after player j's last stage of participation. This suggests that players race to delay revealing their information, which is probably the least desirable outcome for the market's goal. We consider a special case of the D game and cast insights on possible equilibria if one exists.Proceedings of the fourteenth ACM conference on Electronic commerce; 06/2013
Conference Paper: THE IMPACT OF OVERCONFIDENCE ON THE EVALUATION OF INNOVATIONS[Show abstract] [Hide abstract]
ABSTRACT: The evaluation of new products and innovative technologies is a core task of innovation management. Without valid innovation evaluation, companies fail to identify promising endeavors for future business success. However, the evaluation of innovations is characterized by environments where uncertainty is high and strategic context is poorly understood. A relatively new strand of research promisingly taps heterogeneous individual expectations or the wisdom of crowds to generate valid predictions in such environments. But there is strong evidence, that aggregating subjective expectations can yield biased results as individuals often draw highly biased conclusions from available information. Among important individual evaluators of innovations such as entrepreneurs, inventors and business decision makers, overconfidence is the most prominent and important bias. Overconfidence leads individuals to systematically overestimate their evaluation capabilities. We report an experiment that explores the impact of overconfidence on individual behavior in innovation evaluation tasks. We focus a promising method to tap crowd wisdom known as information-or prediction markets, which aggregate individual evaluations of new product success or innovative idea potential via market mechanisms. We induce overconfidence experimentally and study how overconfident individuals interact on these platforms. Our results show, that overconfident individuals turn evaluations into actions earlier, they pursue their predictions with more vigor, are more likely to act according to initial evaluations by disregarding contradictory information and less willing to change a priori predictions after innovation evaluation tasks finish.19th IPDMC; 06/2012
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ABSTRACT: We employ a 2x3 factorial experiment to study two central factors in the design of prediction markets (PMs) for idea evaluation: the overall design of the PM, and the elasticity of market prices set by a market maker. The results show that 'multi-market designs' on which each contract is traded on a separate PM lead to significantly higher trading performance than 'single-markets' that handle all contracts one on PM. Price elasticity has no direct effect on trading performance, but a significant interaction effect with market design implies that the performance difference between the market designs is highest in settings of moderate price elasticity. We contribute to the emerging research stream of PM design through an unprecedented experiment which compares current market designs.Collective Intelligence 2012, Boston, MA, USA; 04/2012
Aggregation and Manipulation in Prediction Markets:
Effects of Trading Mechanism and Information Distribution
School of Information
University of Michigan
Ann Arbor, MI 48109, USA
School of Information
University of Michigan
Ann Arbor, MI 48109, USA
We conduct laboratory experiments on variants of market
scoring rule prediction markets, under different informa-
tion distribution patterns, in order to evaluate the efficiency
and speed of information aggregation, as well as test re-
cent theoretical results on manipulative behavior by traders.
We find that markets structured to have a fixed sequence
of trades exhibit greater accuracy of information aggrega-
tion than the typical form that has unstructured trades.
Prior theoretical predictions of differing strategic behavior
under complementary information distributions and substi-
tute information distributions are confirmed when the trad-
ing order is structured, but not in markets with an un-
structured trading order. In the case of the markets with
a structured order, we find that the information aggregation
is consequently slower when information is complementary,
as traders more frequently engage in bluffing and delaying
strategies. In comparing two commonly used mechanisms,
we find no significant difference between the performance of
the direct probability-report form and the indirect security-
trading form of the market scoring rule.
Categories and Subject Descriptors
J.4 [Computer Applications]: Social and Behavioral Sci-
prediction markets, experiments, market scoring rule
Prediction markets are markets designed to aggregate traders’
information and to forecast future events. Recently, a new
market form for prediction markets, the market scoring rule
∗This work was supported by the National Science Founda-
tion grant CCF-0728768. We thank our research assistants
M. Bombyk and R. Jimenez. A full version of this paper is
posted at http://www.umich.edu/~rsami/papers/JS.pdf.
Copyright is held by the author/owner(s).
EC’10, June 7–11, 2010, Cambridge, Massachusetts, USA.
(MSR) , has become popular.
human-subject laboratory experiments to study the speed
and efficiency of information aggregation in MSR markets,
while varying the mechanism form, constraints on trade tim-
ing, and information distribution pattern.
The first dimension of variation is in comparing two com-
monly used forms of the MSR mechanism: a direct mech-
anism in which traders report their beliefs as probabilities,
and an indirect mechanism in which traders reveal their be-
liefs through buying and selling securities. There is an active
debate about which interface is more effective; our labora-
tory experiments provide insight into this question.
MSR markets have a myopic honesty property: A trader
trading only once maximizes her expected profit by report-
ing her true beliefs .However, for traders using non-
myopic strategies over multiple trades, the theoretical re-
sults show a sharp distinction based on the pattern of infor-
mation distribution. Roughly, when signals are substitutes
honest reporting of beliefs is optimal even in a non-myopic
sense; when signals are complements honest reporting is not
a sequential equilibrium . This motivates the second di-
mension along which we vary our experimental design: We
study market performance under a complementary signal
structure, and under a substitute signal structure.
The third variation we study is in providing the structure
of a fixed sequence of trade opportunities, or an unstructured
market in which traders choose when to trade.
We conducted two-trader market trading experiments for
each of the 8 treatments generated by a factorial explo-
ration, with the following results: First, we find that struc-
tured markets aggregate information more efficiently than
unstructured markets.Second, in the first experimental
comparison between the direct and indirect MSR forms, we
find no significant difference in performance. Third, in test-
ing the theoretical results on the effect of information dis-
tribution on manipulative strategies, we find that they are
borne out for the structured market but not for the unstruc-
tured markets. This suggests that the timing of trades is an
important feature to include in future theoretical research.
In this paper, we use
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