Prediction Markets: An Extended Literature Review Georgios Tziralis and Ilias Tatsiopoulos Sector of Industrial Management and Operational Research School of Mechanical Engineering National Technical University of Athens (final draft) ABSTRACT This paper presents an attempt to study and monitor the evolution of research on prediction markets (PM). It provides an extended literature review and classification scheme. The former consists of 152 articles, published between 1991 and 2006. The results show that an increasing volume of PM research has been conducted in a very diverse range of areas. The articles are further classified and the results of this classification are presented, based on a scheme that consists of four main categories: description, theoretical work, applications, and law and politics. A comprehensive list of references concludes this literature review. It is the authors��� intention to provide an expedient source for anyone interested in PM research and motivate further interest. INTRODUCTION PM emerged fairly recently as a promising forecasting mechanism able to handle efficiently the dynamic aggregation of dispersed information among various agents. The interest that this mechanism attracts seems to be increasing at a steady rate, in terms of both business interest and academic work. This review surveys and examines relevant existing literature and its trends, while it is also designed to provide a unique starting point for the further study of PM literature. While there is no universally accepted terminology and definition of PM, the following definition is used, based on that given by Berg and Rietz [16]: Prediction markets are defined as markets that are designed and run for the primary purpose of mining and aggregating information scattered among traders and subsequently using this information in the form of market values in order to make predictions about specific future events. PM is an exciting area for research, partly because of its novelty and the exploding growth of interest in it. This paper presents a comprehensive review and classification of the literature on PM research, starting from its introduction and the first applications of the PM concept in the early nineties [88, 70, 51] up until the writing of this paper. The scheme used represents the authors��� view of the focus and direction of PM research and reveals a rapid growth in the number of published articles. The current state and direction of research topics should be of interest to many and we hope that this review will serve as a roadmap of PM for both academics and practitioners. The paper is organized as follows. Firstly, the research methodology is described, followed by a commentary on the current ��� and diverse ��� terminology existing in the PM field , along with the evolution and growth of the literature and research itself. Subsequently, a classification method is introduced and its results are analysed. The article finally concludes by presenting research implications and an extended list of PM references. RESEARCH METHODOLOGY

This survey is the outcome of an attempt to collect and study the totality of PM related academic work. Thus far, no relevant literature review could be identified. Hitherto, there existed, for example, no publication outlet dedicated exclusively to PM research. Therefore, the inclusion of every potential source of academic knowledge dissemination was essential. As a result, all journal articles, conference proceedings papers, books or book chapters, master���s theses, doctoral dissertations or other unpublished academic working papers and reports that are referring to the concept of PM were collected, studied and are cited herein. The search was conducted mostly through the World Wide Web, as well as electronic libraries and academic databases. The literature review finally resulted in identifying 152 articles, which are classified by type of publication as shown in Table 1. By its very nature, this review could therefore be characterised as extended but by no means as exhaustive. Nevertheless, it serves as a comprehensive basis for understanding PM research. Table 1: Number of articles per type of publication Type of publication Number of articles Journal articles 55 (36%) Books & book chapters 22 (14%) Conference proceedings 15 (10%) Masters theses & doctoral dissertations 7 (5%) Working papers, reports & unpublished work 53 (35%) Total 152 (100%) TERMINOLOGY PM is not a unique and globally adopted descriptor of the concept and mechanism that was defined previously. On the contrary, the terminology used to address this concept is rather wide. The literature search was based on the following five more usual and relevant descriptors: ���prediction markets���, ���information markets���, ���decision markets���, ���electronic markets��� and ���virtual markets���. Moreover, the references of each article found were further examined as to identify relevant citations that use perhaps another descriptor. The full text of each article was then reviewed to eliminate those articles that were not actually related to PM. The final selection of 152 articles was then classified on the basis of the prevalent descriptor used in each article to describe the concept of PM. The distribution is depicted in Figure 1. Other descriptors which were identified during the research, include ���political stock markets��� [23, 24, 27, 50, 51, 68, 82, 98, 104], ���election stock markets��� [8, 28, 48, 49, 52, 87, 88], ���artificial markets��� [112, 113, 114] and ���idea futures��� [69, 108].

Number of articles per term 0 10 20 30 40 50 60 Prediction markets Information markets Decision markets Electronic markets Virtual markets Other Figure 1: Number of articles per term used to describe the concept of PM It becomes clear that the terminology used to describe the same concept is very diverse and extensive. This fact could lead to the division of the PM society and research at a very early stage of its development and makes the agreement on globally accepted and standardised terminology all the more important, the authors argue. EARLY WORKS AND EVOLUTION The very first application of the PM mechanism, the Iowa Electronic Markets, was initiated in 1988 and originally designed to predict the outcome of US presidential elections [51]. The first academic works on the concept appeared few years later. In 1992, Forsythe, Nelson, Neumann and Wright presented a description of the Iowa Electronic Markets [51], while Hanson offered in the same year the first introductory article on the notion of PM [69]. The early works of the nineties focused mainly on political stock markets applications. Aside from the papers on the most popular PM, the Iowa Electronic Markets [51, 50, 15, 17, 52], other election markets were described and analysed, like the one founded as early as 1990 in Germany [88, 11] as well as others in Canada [8, 48, 49], Austria [104, 98] and Sweden [24]. Ortner also made important contributions to the field with his doctoral dissertation in 1996 [101] and the description of PM���s first application as a business tool by Siemens Austria in 1997 [102, 103]. PM literature up until 1998 is limited to mainly those above-mentioned articles. In the following years however, this survey witnesses a significant increase in the amount of PM literature. The publication trend, as depicted in Figure 2, could be roughly described as being of exponential growth: the number of relevant articles in 2002 corresponded to 14, increased to 22 during 2004, while in the first 8 months of 2006 there were already 34 published articles.