Wishful Thinking, Manipulation, and the Wisdom of Crowds: Evidence from a Political Betting Market
David M. Rothschild
Microsoft Research - NYC
Columbia University, Barnard College - Department of Economics; Santa Fe Institute
June 9, 2015
Political betting markets have become an increasingly important vehicle for the prediction of electoral outcomes, but the manner in which they aggregate beliefs and generate credible forecasts remains obscure. Furthermore, they are potentially vulnerable to manipulation by deep-pocketed partisans. We examine transaction-level data from Intrade's 2012 presidential winner market for the entire two-year period over which trading occurred, and identify a diverse set of trading strategies that constitute a rich market ecology. It is the complex and dynamic interaction of these strategies that generates the forecasts on which media attention is focused. We provide evidence of widespread wishful thinking among market participants as well a sustained and modestly successful attempt at manipulation by a well-funded trader. Despite these features the forecasting accuracy of the market was high, and we consider the reasons for this.
Number of Pages in PDF File: 27
Keywords: Prediction Markets, Wishful Thinking, Manipulation, Forecasting Elections
JEL Classification: G12, D83, D84
Date posted: September 9, 2013 ; Last revised: June 10, 2015
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