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Title: Prediction Markets in Theory and Practice

Author(s): Justin Wolfers and Eric Zitzewitz

Publication Date: March 2006

Keyword(s): event futures, forecasting, futures, information aggregation, information markets and prediction markets

Programme Area(s): Financial Economics, Labour Economics and Public Economics

Abstract: 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.

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Bibliographic Reference

Wolfers, J and Zitzewitz, E. 2006. 'Prediction Markets in Theory and Practice'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5578