DP5578 Prediction Markets in Theory and Practice

Author(s): Justin Wolfers, Eric Zitzewitz
Publication Date: March 2006
Keyword(s): event futures, forecasting, futures, information aggregation, information markets, prediction markets
JEL(s): C53, D8, G14
Programme Areas: Labour Economics, Public Economics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5578

Prediction Markets, sometimes referred to as 'information markets', 'idea futures' or 'event futures', are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.