Eliminating Public Knowledge Biases in Small Group Predictions

Abstract:     
We present a novel methodology for identifying public knowledge and eliminating the biases it creates when aggregating information in small group settings. A two-stage mechanism consisting of an information market and a coordination game is used to reveal and adjust for individuals' public information. A nonlinear aggregation of their decisions then allows for the calculation of the probability of the future outcome of an uncertain event, which can then be compared to both the objective probability of its occurrence and the performance of the market as a whole. Experiments show that this nonlinear aggregation mechanism outperforms both the imperfect market and the best of the participants.

Number of Pages in PDF File: 25

Keywords: information markets, public information, experimental economics, mechanism design

JEL Classification: C7, D7, D8

working papers series