Massachusetts Institute of Technology
INTERPRETING PREDICTION MARKET PRICES AS PROBABILITIES
Justin Wolfers, Wharton School
Talk based on joint work with Eric Zitzewitz
Monday May 14, 2007 4:00-5:30 pm
NE20, Room 336 Conference Room (3 Cambridge Center)
Slides from This Past Seminar are Available
An Audio Recording of this talk is now available (Requires Real Player 8.0+)
Abstract
While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.
Speaker bio
Justin Wolfers is assistant professor of economics in the Business and Public Policy Department at the Wharton School. He is a visiting scholar with the San Francisco Federal Reserve, a Research Fellow with the National Bureau of Economic Research in Cambridge, MA, and a Research Affiliate of the Center for Economic Policy Research in London, and the Institute for the Study of Labor (IZA) in Bonn. He was previously an Assistant Professor at Stanford's Graduate School of Business, and an economist with the Reserve Bank of Australia. Dr. Wolfers earned his Ph.D. in economics in June 2001 from Harvard University, and was a Fulbright, Knox and Menzies Scholar and a fellow with the MacArthur Network on Inequality and Social Interactions. He earned his undergraduate degree in Economics his native Australia at the University of Sydney in 1994, winning the University Medal. In 2002 he was awarded the Milken Institute prize for distinguished economic research. Professor Wolfers' research fields are in labor economics, macroeconomics, law and economics, and behavioral economics, and he is also a frequent contributor to the public debate.
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