Public Information Bias and Prediction Market Accuracy
Thomas Gruca, Joyce E. Berg and Michael Cipriano
The Journal of Prediction Markets
Volume 1, Number 3, pages 219-231, 2007 (December)
How do prediction markets achieve high levels of accuracy?
We propose that, in some situations, traders in prediction markets
improve upon publicly available information. Specifically, when there
is a known bias in publicly available information, markets provide an
incentive for traders to "de-bias" this information. In such a situation,
a prediction market will provide a more accurate forecast than the public
information available to traders. We test our conjecture using real-money
prediction markets for seven local elections in the United States. We find
that the prediction market forecasts are significantly more accurate than
those generated using the pre-election polls.
- Published Paper