TY  - JOUR
AU  - Manski,Charles F.
TI  - Interpreting the Predictions of Prediction Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10359
PY  - 2004
Y2  - March 2004
UR  - http://www.nber.org/papers/w10359
L1  - http://www.nber.org/papers/w10359.pdf
N1  - Author contact info:
Charles F. Manski
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL  60208
Tel: 847/491-8223
Fax: 847/491-7001
E-Mail: cfmanski@northwestern.edu
AB  - Participants in prediction markets such as the Iowa Electronic Markets trade all-or-nothing contracts that pay a dollar if and only if specified future events occur. Researchers engaged in empirical study of prediction markets have argued broadly that equilibrium prices of the contracts traded are  market probabilities' that the specified events will occur. This paper shows that if traders are risk-neutral price takers with heterogenous beliefs, the price of a contract in a prediction market reveals nothing about the dispersion of traders' beliefs and partially identifies the central tendency of beliefs. Most persons have beliefs higher than price when price is above 0.5, and most have beliefs lower than price when price is below 0.5. The mean belief of traders lies in an interval whose midpoint is the equilibrium price. These findings persist even if traders use price data to revise their beliefs in plausible ways.
ER  -