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:||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.