Anatomy of an Experimental Political Stock Market
Robert Forsythe, Forrest D. Nelson, George R. Neumann and Jack Wright
American Economic Review
Volume 82, Issue 5, pages 1142-1161, 1992
Results from the Iowa Political Stock Market are analyzed to ascertain how well
markets work as aggregators of information. We find that the market worked
extremely well, dominating opinion polls in forecasting the outcome of the 1988
presidential election, even though traders in the market exhibited substantial
amounts of judgment biases. Our explanation is that judgment bias refers to
average behavior, while in markets it is marginal traders who influence price.
We present evidence that in this market a sufficient number of traders were
free of judgment bias so that the market was able to work well.