Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129582
Authors: 
Siemroth, Christoph
Year of Publication: 
2014
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 14-29
Abstract: 
In prediction markets, investors trade assets whose values are contingent on the occurrence of future events, like election outcomes. Prediction market prices have been shown to be consistently accurate forecasts of these outcomes, but we don't know why. I formally illustrate an information acquisition explanation. Traders with more wealth to invest have stronger incentives to acquire information about the outcome, thus tend to have better forecasts. Moreover, their trades have larger weight in the market. The interaction implies that a few well-situated traders can move the asset price toward the true value. One implication for institutions aggregating information is to put more weight on votes of agents with larger stakes, which improves on equal weighting, unless prior distribution accuracy and stakes are negatively related.
Subjects: 
Information Acquisition
Information Aggregation
Forecasting
Futures Markets
Prediction Markets
JEL: 
D83
D84
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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