Knowledge Center
Basic Knowledge
What are Prediction Markets?
Prediction markets (also known as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are speculative markets created for the purpose of making predictions. Assets are created whose final cash value is tied to a particular event (e.g., will the next US president be a Republican) or parameter (e.g., total sales next quarter). The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter. Prediction markets are thus structured as betting exchanges, without any risk for the bookmaker.
People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants. (Source: http://en.wikipedia.org/wiki/Prediction_market)
Advanced Knowledge
Wolfers, Justin, & Eric Zitzewitz. (2004 / 2005).
Prediction Markets
Prediction Markets in Theory and Practice
These papers provides a good overview on the types, dynamics and applications of online prediction markets.
Hahn, Robert W., & Tetlock, Paul C. (2006).
Information Markets
A very extensive overview of relevant literature. If you have read the whole package you should apply for a PhD in prediction market research :)
Servan-Schreiber, Emile; Wolfers, Justin; Pennock, David M., & Galebach, Brian. (2004).
Prediction Markets: Does Money Matter?
An empirical approach to the question whether real-money prediction markets generate higher forecasting accuracy than play-money ones. To cut the story short: Play-money works just as fine.
Diemer, Sebastian. (2010).
Real-Money vs. Play-Money Forecasting Accuracy in Online Prediction Markets
A direct comparison of real- and play-money comparision: Real-money incentives yield excess accuracy for identical events.
Berg, Joyce et al. (2008).
Results From a Dozen Years of Election Futures Market Research
Another general paper on the dynamics, efficiency and application of prediction markets
Hanson, Robert. (2002 / 2003).
Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation
Combinatorial Information Market Design
Two ground-breaking papers on a market-maker that allows for more efficient trading than under continuous double auctions. PredictX operates a market-maker that is based on Hanson's scoring rule and was further developed.