Prediction Markets for Economic Forecasting
Prediction markets--markets used to forecast future events--have been used to accurately forecast the outcome of political contests, sporting events, and, occasionally, economic outcomes. This chapter summarizes the latest research on prediction markets in order to further their utilization by economic forecasters. We show that prediction markets have a number of attractive features: they quickly incorporate new information, are largely efficient, and impervious to manipulation. Moreover, markets generally exhibit lower statistical errors than professional forecasters and polls. Finally, we show how markets can be used to both uncover the economic model behind forecasts, as well as test existing economic models.
This was prepared for the Handbook of Economic Forecasting, Volume 2. We dedicate this chapter to the memory of John Delaney, founder and CEO of Intrade.com. An innovator and source of inspiration for many prediction market researchers, he will be sorely missed. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Prediction Markets for Economic Forecasting Handbook of Economic Forecasting, Volume 2, Graham Elliott and Allan Timmermann (eds.), Elsevier (2013). With Justin Wolfers and Eric Zitzewitz.