The Power of Predictive Markets
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A recent article in The Journal of Economic Perspectives by Justin Wolfers and Eric Zitzewitz describes how a new kind of market for prediction and forecasting delivers surprisingly accurate results in a variety of domains.
Here, we see predicted versus actual movie opening takes, based on data from the Hollywood Stock Exchange.
Exerpt from article:
These insights suggest that some prediction markets will work better when they concern events that are widely discussed, since trading on such events will have higher entertainment value and there will be more information on whose interpretation traders can disagree. Ambiguous public information may be better in motivating trade than private information, especially if the private information is concentrated, since a cadre of highly informed traders can easily drive out the partly informed, repressing trade to the point that the market barely exists. Indeed, attempts to set up markets on topics where insiders are likely to possess substantial information advantages have typically failed.
Reference:
Wolfers, J. & Zitzewitz, E. Prediction Markets. The Journal of Economic Perspectives, 18(2),107-126
