This paper examines five significant issues with prediction markets and attempts to solve them in order to determine if the current level of enthusiasm for their potential is appropriate or not. One of the points argued is that prediction markets depend heavily on the "uninformed trader" who is ironically the hardest type of person to attract. They recognize that play-money markets have been found to predict as effectively as real-money markets, but argue that the issue of attracting this type of person still exists. Finally they conclude that offering sports or entertainment betting, subsidizing the investment and personal career concerns have been chief effective motivators in the past for this sector of trader.
While this article also examines other issues with prediction markets, the question of the "uninformed trader" is one crucial to the argument of the diverse crowd and choosing the right incentives. They develop an interesting conclusion on this issue, that is not really repeated in any other literature on the subject. However, since in the case of the markets I am studying, the entertainment value already exists, and there is no way to purposefully boost career concerns, it seems that subsidizing the investment is the only plausable incentive they seem to offer to reach more diverse crowds. My question from this article is why they would even worry about conducting the market in real money if play-money games with prizes seemed to work just as effectively?
tagged markets prediction by geoa ...on 09-APR-09
This article challenges the conventional belief amongst economists that "markets where traders risk their own money should produce better forecasts than markets where traders run no financial risk." In actuality, real money markets reflect more than past predicitive performance, they relfect an entire mass of social factors behind individual wealth, like financial status and willingness to take risks. Play-money prediction markets are based solely on track record and previous predictive performance and many systems use this model in addition to prize incentives based on rank to ensure players continue to buy and sell. The primary research of this paper is a study conducted to determine the level of accuracy sacrificed when using play-money compared to real-money prediction markets. The conclusion reached was that both markets were almost identical in accuracy.
It appears that though the predicitve power of these two real and play money markets are about equal, that the play-money one would actualy average a closer fit to Surowiecki's opinions about what constitutes a good market by eliminating the discouraging financial factor. This study is crucial in the examination of incentives as it attacks a noticible divide within the prediction market world.