TY  - JOUR
AU  - Wolfers,Justin
AU  - Zitzewitz,Eric
TI  - Interpreting Prediction Market Prices as Probabilities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12200
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12200
L1  - http://www.nber.org/papers/w12200.pdf
N1  - Author contact info:
Justin Wolfers
Business and Public Policy Department
Wharton School, University of Pennsylvania
3620 Locust Walk
Room 1456 Steinberg-Deitrich Hall
Philadelphia, PA 19104-6372
Tel: (215) 898-3013
Fax: (215) 898-7635
E-Mail: jwolfers@wharton.upenn.edu

Eric Zitzewitz
Department of Economics
Dartmouth College
6106 Rockefeller Hall
Hanover, NH 03755
Tel: 603/646-2891
Fax: 603/646-2122
E-Mail: eric.zitzewitz@dartmouth.edu
M2  - featured in NBER digest on 2006-05-08
AB  - While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice.  We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs.  Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders.  The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution of beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts.  We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.
ER  -