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Prediction Markets

Justin Wolfers
University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); Federal Reserve Bank of San Francisco; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Kiel Institute for the World Economy

Eric Zitzewitz
Dartmouth College


April 2004

Stanford GSB Research Paper No. 1854

Abstract:     
We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of uncertain future events. Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks. Carefully designed contracts can yield insight into the market's expectations about probabilities, means and medians, and also uncertainty about these parameters. Moreover, conditional markets can effectively reveal the market's beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation. We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful.

Keywords: Idea futures, forecasting, economic policy, information markets, prediction markets, policy evaluation, macroeconomics, microeconomics, public policy

JEL Classifications: D7, D8, E3, E6, G1, H8, Q4

Working Paper Series

Date posted: June 30, 2004 ; Last revised: July 04, 2004

Suggested Citation

Wolfers, Justin and Zitzewitz, Eric, Prediction Markets (April 2004). Stanford GSB Research Paper No. 1854. Available at SSRN: http://ssrn.com/abstract=560070


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Contact Information

Justin Wolfers (Contact Author)
University of Pennsylvania - Business & Public Policy Department ( email )
Philadelphia, PA 19104-6372
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/~jwolfers
Institute for the Study of Labor (IZA)
P.O. Box 7240
D-53072 Bonn Germany
HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=1737
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR United Kingdom
HOME PAGE: http://www.cepr.org/researchers/details/rschcontact.asp?IDENT=157943
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
United States
HOME PAGE: http://www.frbsf.org/economics/economists/
CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )
Poschinger Str. 5
DE-81679 Munich Germany
Kiel Institute for the World Economy ( email )
P.O. Box 4309
Kiel D-24100
Germany
Eric W. Zitzewitz
Dartmouth College ( email )
Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)
HOME PAGE: http://www.dartmouth.edu/~ericz
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References: 28
Citations: 58

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