Far from the Madding Crowd: Collective Wisdom in Prediction Markets. Bottazzi, G. 2016. ![Far from the Madding Crowd: Collective Wisdom in Prediction Markets [pdf]](https://bibbase.org/img/filetypes/pdf.svg "pdf")
Website abstract bibtex 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 (a form of social influence), agents further decrease the agreement between market prices and true probabilities. The analysis has implications for financial instruments like CDS whose prices are interpreted as the probability of default. In that case one should be careful in such interpretation since the price may be an heavily biased measure. Moreover the analysis shows the need for policies aimed to discourage agents from acting strategically in order to exploit the informative content of prices. In the end considering agents connected by financial interdependencies one may imagine that the already existing bias gets worse, since the social influence effect discussed in the paper becomes stronger and asset evaluations move further away from fundamentals.
@unpublished{
title = {Far from the Madding Crowd: Collective Wisdom in Prediction Markets},
type = {unpublished},
year = {2016},
source = {working paper},
websites = {http://www.lem.sssup.it/WPLem/files/2016-14.pdf},
id = {95e53e38-15e8-31bf-8371-c20987621250},
created = {2016-10-31T11:02:55.000Z},
file_attached = {false},
profile_id = {8856f0a8-e934-3b54-83b3-1dc0f138e432},
group_id = {bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad},
last_modified = {2017-03-14T12:29:36.496Z},
tags = {DOLFINS_T1.4,DOLFINS_WP1},
read = {false},
starred = {false},
authored = {false},
confirmed = {true},
hidden = {false},
citation_key = {Bottazzi2016c},
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 (a form of social influence), agents further decrease the agreement between market prices and true probabilities. The analysis has implications for financial instruments like CDS whose prices are interpreted as the probability of default. In that case one should be careful in such interpretation since the price may be an heavily biased measure. Moreover the analysis shows the need for policies aimed to discourage agents from acting strategically in order to exploit the informative content of prices. In the end considering agents connected by financial interdependencies one may imagine that the already existing bias gets worse, since the social influence effect discussed in the paper becomes stronger and asset evaluations move further away from fundamentals.},
bibtype = {unpublished},
author = {Bottazzi, Giulio}
}
Downloads: 0
{"_id":"TK2vWWYDdSfDRz3Y7","bibbaseid":"bottazzi-farfromthemaddingcrowdcollectivewisdominpredictionmarkets-2016","downloads":0,"creationDate":"2016-11-22T10:32:19.063Z","title":"Far from the Madding Crowd: Collective Wisdom in Prediction Markets","author_short":["Bottazzi, G."],"year":2016,"bibtype":"unpublished","biburl":null,"bibdata":{"title":"Far from the Madding Crowd: Collective Wisdom in Prediction Markets","type":"unpublished","year":"2016","source":"working paper","websites":"http://www.lem.sssup.it/WPLem/files/2016-14.pdf","id":"95e53e38-15e8-31bf-8371-c20987621250","created":"2016-10-31T11:02:55.000Z","file_attached":false,"profile_id":"8856f0a8-e934-3b54-83b3-1dc0f138e432","group_id":"bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad","last_modified":"2017-03-14T12:29:36.496Z","tags":"DOLFINS_T1.4,DOLFINS_WP1","read":false,"starred":false,"authored":false,"confirmed":"true","hidden":false,"citation_key":"Bottazzi2016c","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 (a form of social influence), agents further decrease the agreement between market prices and true probabilities. The analysis has implications for financial instruments like CDS whose prices are interpreted as the probability of default. In that case one should be careful in such interpretation since the price may be an heavily biased measure. Moreover the analysis shows the need for policies aimed to discourage agents from acting strategically in order to exploit the informative content of prices. In the end considering agents connected by financial interdependencies one may imagine that the already existing bias gets worse, since the social influence effect discussed in the paper becomes stronger and asset evaluations move further away from fundamentals.","bibtype":"unpublished","author":"Bottazzi, Giulio","bibtex":"@unpublished{\n title = {Far from the Madding Crowd: Collective Wisdom in Prediction Markets},\n type = {unpublished},\n year = {2016},\n source = {working paper},\n websites = {http://www.lem.sssup.it/WPLem/files/2016-14.pdf},\n id = {95e53e38-15e8-31bf-8371-c20987621250},\n created = {2016-10-31T11:02:55.000Z},\n file_attached = {false},\n profile_id = {8856f0a8-e934-3b54-83b3-1dc0f138e432},\n group_id = {bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad},\n last_modified = {2017-03-14T12:29:36.496Z},\n tags = {DOLFINS_T1.4,DOLFINS_WP1},\n read = {false},\n starred = {false},\n authored = {false},\n confirmed = {true},\n hidden = {false},\n citation_key = {Bottazzi2016c},\n 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 (a form of social influence), agents further decrease the agreement between market prices and true probabilities. The analysis has implications for financial instruments like CDS whose prices are interpreted as the probability of default. In that case one should be careful in such interpretation since the price may be an heavily biased measure. Moreover the analysis shows the need for policies aimed to discourage agents from acting strategically in order to exploit the informative content of prices. In the end considering agents connected by financial interdependencies one may imagine that the already existing bias gets worse, since the social influence effect discussed in the paper becomes stronger and asset evaluations move further away from fundamentals.},\n bibtype = {unpublished},\n author = {Bottazzi, Giulio}\n}","author_short":["Bottazzi, G."],"urls":{"Website":"http://www.lem.sssup.it/WPLem/files/2016-14.pdf"},"bibbaseid":"bottazzi-farfromthemaddingcrowdcollectivewisdominpredictionmarkets-2016","role":"author","downloads":0},"search_terms":["far","madding","crowd","collective","wisdom","prediction","markets","bottazzi"],"keywords":[],"authorIDs":[]}