Monday, December 31, 2007

Justin Wolfers in the WSJ on prediction markets

He writes:

In a truly efficient prediction market, the price will come to reflect the influence of all available information. For instance, those discouraged by Hillary Clinton’s recent polling in New Hampshire are probably selling, while those who believe endorsements by the Iowa Register are crucial are buying. If this market operates efficiently, it will appropriately summarize all of this information and the price will become the most statistically accurate forecast of the election outcome.

Two other characteristics also distinguish prediction markets. First, they respond to all sorts of news beyond shifts in public opinion, including changes in campaign staff, political re-positioning, and performance on the trail. Second, prediction markets are forward-looking, while polls are often backward-looking. Read the full article.

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