Information aggregation and manipulation in an experimental market

Abstract

Prediction markets are increasingly being considered as methods for gathering, summarizing and aggregating diffuse information by governments and businesses alike. Critics worry that these markets are susceptible to price manipulation by agents who wish to distort decision making. We study the effect of manipulators on an experimental market. We find that manipulators are unable to distort price accuracy. Subjects without manipulation incentives compensate for the bias in offers from manipulators by setting a different threshold at which they are willing to accept trades.

Cognitive Enhancement: Methods, Ethics, Regulatory Challenges

“…The prices of these bets tend to reflect the best information available about the probability of whether the events will occur (Hanson et al 2003). Such markets appear to be self-correcting and resilient, and have been shown to outperform alternative methods of generating probabilistic forecasts, such as opinion polls and expert panels (Hanson et al 2006). …”

Instructor Rating Markets

“…There has been both theoretical [14] and experimental [15] work on quantifying the potential effects of manipulators on prediction markets. Our experiment differs in that the objective of a potential manipulator is not known to traders.…”

“…In the first case traders make money directly from the artificially high liquidation value of the security, whereas the second case increases their wealth in comparison to other traders. Since several prizes were allotted based on relative account values, there were incentives for collusion of either form, but the behavior was not explicitly incentivized as in [15].…”

Designing real terrorism futures

“…From the very start, the Net Exchange team began laboratory experiments on price manipulation, as this was a widely expressed concern (Hanson, Oprea, & Porter, 2007). Also from the start, we planned to forecast military and political instability around the world, how US policies would effect such instability, and how such instability would impact US and global aggregates of interest.…”

“…While we know of at least one apparently successful manipulation attempt (Hansen, Schmidt, & Strobel, 2004), many have reported that manipulators have failed to reduce price accuracy, historically (Strumpf & Rhode, 2004), in the field (Camerer, 1998), and in the laboratory (Hanson et al, 2007). A recent review article concludes that "none of these attempts at manipulation had much of a discernible effect on prices, except during a short transition phase" (Wolfers & Zitzewitz, 2004).…”