2016/14 | LEM Working Paper Series | ||||||||||||||||
Far from the Madding Crowd: Collective Wisdom in Prediction Market |
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Giulio Bottazzi and Daniele Giachini |
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Keywords | |||||||||||||||||
Prediction Markets, Bet Pricing, Wisdom of Crowds, Market Selection, Heterogeneous Beliefs, Fractional Kelly Rule
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JEL Classifications | |||||||||||||||||
C60, D53, G11, G12
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Abstract | |||||||||||||||||
We investigate market selection and bet pricing in a simple Arrow
secu- rity economy which we show is equivalent to the repeated
prediction mar- ket models studied in the literature. We derive the
condition for long run survival of more than one agent (the crowd) and
quantify the information content of prevailing prices in the case of
two fractional Kelly traders with heterogeneous beliefs. It turns out
that, apart some non-generic situations, prices do not converge,
neither almost surely nor on average, to true prob- abilities. Nor are
they always nearer to the truth than the believes of all surviving
agents. Moreover, we show that by adapting their beliefs to past
prices, agents further decrease the agreement between market prices
and true probabilities.
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