PREDICTION MARKETS: PRACTICAL EXPERIMENTS IN SMALL MARKETS AND BEHAVIOURS OBSERVED

Abstract

This paper discusses a series of prediction markets created and operated in the summer of 2006 to measure calibration and behaviour of small-scale prediction markets. The research finds that small markets are very well calibrated and determines a potential minimum threshold of participation to ensure well-calibrated results. The results also established the markets as very efficient at predicting small probabilities. Behavioural aspects of markets are also examined. Trader behavioural types are assessed and categorised; while a small group of traders were extremely active, over half of all traders rarely traded. Market manipulation is examined and found to be occasionally effective, though only in very small markets. Finally, incentives to trade are discussed; these markets were effective with no incentives for trading at all.