Prediction Markets: An Analysis

Abstract

The report provides an analysis of the prediction markets and the factors which influence them. Four factors, namely, number of players, market manipulation, influence of participants and time were considered. These factors were tested in both real money and play money markets (in IIM Ahmedabad). The accuracy of these markets was analysed based on the error index which was calculated as mod (predicted value-real value)/real value). Number of participants in the prediction market did not have any influence on the accuracy of the prediction market. The possibility of manipulation through extra “loss” accounts did affect the accuracy of the prediction market. The mean accuracy of the markets in which manipulation was allowed, was higher than that of the markets in which such manipulation was not allowed. Ability to influence the underlying metric did result in higher accuracy. Additionally, it was observed that the prediction error increases as the event for which we are making the prediction comes closer.