Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174523
Authors: 
Bottazzi, Giulio
Giachini, Daniele
Year of Publication: 
2016
Series/Report no.: 
LEM Working Paper Series 2016/14
Abstract: 
We investigate market selection and bet pricing in a simple Arrow security economy which we show is equivalent to the repeated prediction market models studied in the literature. We derive the condition for long run survival of more than one agent (the crowd) and quantify the information content of prevailing prices in the case of two fractional Kelly traders with heterogeneous beliefs. It turns out that, apart some non-generic situations, prices do not converge, neither almost surely nor on average, to true probabilities. Nor are they always nearer to the truth than the believes of all surviving agents. Moreover, we show that by adapting their beliefs to past prices, agents further decrease the agreement between market prices and true probabilities.
Subjects: 
Prediction Markets
Bet Pricing
Wisdom of Crowds
Market Selection
Heterogeneous Beliefs
Fractional Kelly Rule
JEL: 
C60
D53
G11
G12
Document Type: 
Working Paper

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