Effects of Social Networks on Prediction Markets: Examination in a Controlled Experiment

Forthcoming in Journal of Management Information Systems

40 Pages Posted: 7 Nov 2013 Last revised: 15 Feb 2014

See all articles by Liangfei Qiu

Liangfei Qiu

University of Florida - Warrington College of Business Administration

Huaxia Rui

University of Rochester - Simon Business School

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: November 5, 2013

Abstract

This paper examines the effect of a social network on prediction markets using a controlled laboratory experiment that allows us to identify causal relationships between a social network and the performance of an individual participant, as well as the performance of the prediction market as a whole. Through a randomized experiment, we first confirm the theoretical predictions that participants with more social connections are less likely to invest in information acquisition from outside information sources but perform significantly better than other participants in prediction markets. We further show that when the cost of information acquisition is low, a social-network-embedded prediction market outperforms a non-networked prediction market. We also find strong support for peer effects in prediction accuracy among participants. These results have direct managerial implications for the business practice of prediction markets and are critical to understanding how to use social networks to improve the performance of prediction markets.

Keywords: social networks, prediction markets, information acquisition

Suggested Citation

Qiu, Liangfei and Rui, Huaxia and Whinston, Andrew B., Effects of Social Networks on Prediction Markets: Examination in a Controlled Experiment (November 5, 2013). Forthcoming in Journal of Management Information Systems, Available at SSRN: https://ssrn.com/abstract=2349496 or http://dx.doi.org/10.2139/ssrn.2349496

Liangfei Qiu (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/qiuliangfei/

Huaxia Rui

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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