Consensus and Differences of Opinion in
Electronic Prediction Markets
Thomas Gruca, Joyce E. Berg and Michael Cipriano
Volume 15, Issue 1, pages 13-22, 2005
Businesses are exploring the use of prediction markets to assist
with forecasting. In this study, we focus on the ability of prediction
markets to reflect the consensus of trader forecasts as well as the
dispersion of these forecasts. Using a real-money, computerized,
anonymous double-auction market mechanism, we examine a series of
markets forecasting a real-life outcome, i.e., movie box office performance.
This continuous outcome was segmented into a small number of mutually
exclusive ranges, each associated with a winner-take-all contract.
This payoff structure allowed us to determine whether the contract
prices reflect the dispersion of the traders' individual forecasts,
which were submitted before trading began. We find that these
markets do an excellent job revealing the consensus forecast.
The market prices for all contracts are consistent with the entire
distribution of trader forecasts for most of the markets.
In addition, we find that markets with a wider pool of traders tend to
result in superior forecasts.
- Published Paper