Thursday, August 23, 2007

Can prediction markets be gamed?

Some people think so. Anyone with more certain information to an outcome could certainly reap profits from counterparties providing liquidity into a prediction market.

But what of the temptation of the self-fulfilling prophecy? For example, someone could buy a terrorist event contract cheaply, and then attempt a terrorist act such that his contracts expire in the money.

Markets require anonymity for greater efficiency (people are known to say one thing but then do another). But insider trading patterns are an audit trail that can lead to the insider traders, so is that enough of a disincentive to check the temptation?

UPDATE: Chris Masse, I wanted to cross post this on MO, and also comment on your recent global warming contract post, but I cannot access the site. Feel free to cross post this if you are able, and my comment was going to be along the lines of "No blogger has honor as a guest blogger" or something like that.

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