NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Prediction Markets in Theory and Practice

Justin Wolfers, Eric Zitzewitz

NBER Working Paper No. 12083
Issued in March 2006
NBER Program(s):   AP   EFG

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.

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Document Object Identifier (DOI): 10.3386/w12083

Published: Blume, Larry and Steven Durlauf (eds.) The New Palgrave Dictionary of Economics, 2nd ed. London: Palgrave, 2008.

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