Proceedings of the National Academy of Sciences of the United States of America, Jan 15, 2005
In this article we use laboratory experiments to ask a fundamental question: Do individuals behav... more In this article we use laboratory experiments to ask a fundamental question: Do individuals behave as if their risk preferences are stable across institutions? In particular, we study the decisions of cash-motivated subjects in the repeated play of three different institutions: a value elicitation procedure for the sale of a risky asset, an English clock auction for the sale of a risky asset, and a first-price auction for the purchase of a riskless asset. We first do a simple categorical comparison of each subject's risk preferences across tasks by comparing the individual's decisions with an expected value maximizer. All subjects acted as if they were risk-loving in the English clock auctions and risk-averse in the first-price auctions. In the Becker, Degroot, and Marschack procedure, behavior was split between risk-loving and risk-averse bidding. For each institution we also estimate an individual's risk coefficient. We test the hypotheses that for the same individuals...
How do prediction markets achieve high levels of accuracy? We propose that, in some situations, t... more How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.
Economic rationality dictates that only incremental costs and benefits should affect decisions. O... more Economic rationality dictates that only incremental costs and benefits should affect decisions. Observed behavior often seems to violate this principle, resulting in unwarranted commitment to past choices and their escalation. In this paper, we present experimental results that show that information asymmetry plays a key role in determining when such escalation behavior occurs. This finding opens new avenues for mitigating
In this paper, we extend field experiments of real money prediction markets to the problem of for... more In this paper, we extend field experiments of real money prediction markets to the problem of forecasting the success of a new product. We collect forecasts using a traditional survey mechanism and a market mechanism. Our results suggest that market prices summarize the information contained in survey forecasts and improve those forecasts by reducing the variability of the forecast. However, we find no evidence of a "crystal ball" equilibrium. Our markets have considerable variability and predict only as well as the public signal provided by the HSX movie market game.
Prediction markets for future events are increasingly common, and they often trade several contra... more Prediction markets for future events are increasingly common, and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that portfolio of contracts even if transactions costs were zero. Because common parametric distributions can con ‡ict with observed prediction market prices, the distribution is given a nonparametric representation together with a prior distribution favoring smooth and concentrated distributions. The paper …nds posterior modal distributions for popular vote shares of the U.S. Presidential candidates in the 100 days leading up to the elections of 1992, 1996, 2000 and 2004, using bid and ask prices on multiple contracts from the Iowa Electronic Markets. On some days the distributions are multimodal or substantially asymmetric. The derived distributions are more concentrated than the historical distribution of popular vote shares in presidential elections, but do not tend to become more concentrated as time to elections diminishes.
In this paper, we document a "play-out" effect in preference reversal experiments. We compare dat... more In this paper, we document a "play-out" effect in preference reversal experiments. We compare data where preferences are elicited using (1) purely hypothetical gambles, (2) played-out, but unpaid gambles and (3) played-out gambles with truth-revealing monetary payments. We ask whether a model of stable preferences with random errors (e.g., expected utility with errors) can explain the data. The model is strongly rejected in data collected using purely hypothetical gambles. However, simply playing-out the gambles, even in the absence of payments, shifts the data pattern so that noisy maximization is no longer rejected. Inducing risk preferences using a lottery procedure, using monetary incentives or both shift the data pattern further so that noisy maximization achieves the best possible fit to the aggregate data. No model could fit the data better. We argue that playout shifts the response pattern by inducing value because subjects can use outcomes to "keep score." Induction or monetary payments create stronger induced values, shifting the pattern further.
Valuations from "prediction markets" reveal expectations about the likelihood of events. "Conditi... more Valuations from "prediction markets" reveal expectations about the likelihood of events. "Conditional prediction markets" reveal expectations conditional on other events occurring. For example, in 1996, the Iowa Electronic Markets (IEM) ran markets to predict the chances that different candidates would become the Republican Presidential nominee. Other concurrent IEM markets predicted the vote shares that each party would receive conditional on the Republican nominee chosen. Here, using these markets as examples, we show how such markets could be used for decision support. In this example, Republicans could have inferred that Dole was a weak candidate and that his nomination would result in a Clinton victory. This is only one example of the widespread potential for using specific decision support markets.
In this paper we present an innovative teaching tool for introductory financial accounting studen... more In this paper we present an innovative teaching tool for introductory financial accounting students that promotes active leaming using methods at the frontier of market research. We describe the implementation of an asset market where students assume the role of traders in order to leam the role of information in price formation. We discuss the pedagogical questions which are addressed in the design of this market, and we relate the responses to questionnaires distributed to students at the end of the quarter. When we control for prior grade point averages (GPAs) of students, we find that those who participate in the market had better classroom performance.
Proceedings of the National Academy of Sciences of the United States of America, Jan 15, 2005
In this article we use laboratory experiments to ask a fundamental question: Do individuals behav... more In this article we use laboratory experiments to ask a fundamental question: Do individuals behave as if their risk preferences are stable across institutions? In particular, we study the decisions of cash-motivated subjects in the repeated play of three different institutions: a value elicitation procedure for the sale of a risky asset, an English clock auction for the sale of a risky asset, and a first-price auction for the purchase of a riskless asset. We first do a simple categorical comparison of each subject's risk preferences across tasks by comparing the individual's decisions with an expected value maximizer. All subjects acted as if they were risk-loving in the English clock auctions and risk-averse in the first-price auctions. In the Becker, Degroot, and Marschack procedure, behavior was split between risk-loving and risk-averse bidding. For each institution we also estimate an individual's risk coefficient. We test the hypotheses that for the same individuals...
How do prediction markets achieve high levels of accuracy? We propose that, in some situations, t... more How do prediction markets achieve high levels of accuracy? We propose that, in some situations, traders in prediction markets improve upon publicly available information. Specifically, when there is a known bias in publicly available information, markets provide an incentive for traders to "de-bias" this information. In such a situation, a prediction market will provide a more accurate forecast than the public information available to traders. We test our conjecture using real-money prediction markets for seven local elections in the United States. We find that the prediction market forecasts are significantly more accurate than those generated using the pre-election polls.
Economic rationality dictates that only incremental costs and benefits should affect decisions. O... more Economic rationality dictates that only incremental costs and benefits should affect decisions. Observed behavior often seems to violate this principle, resulting in unwarranted commitment to past choices and their escalation. In this paper, we present experimental results that show that information asymmetry plays a key role in determining when such escalation behavior occurs. This finding opens new avenues for mitigating
In this paper, we extend field experiments of real money prediction markets to the problem of for... more In this paper, we extend field experiments of real money prediction markets to the problem of forecasting the success of a new product. We collect forecasts using a traditional survey mechanism and a market mechanism. Our results suggest that market prices summarize the information contained in survey forecasts and improve those forecasts by reducing the variability of the forecast. However, we find no evidence of a "crystal ball" equilibrium. Our markets have considerable variability and predict only as well as the public signal provided by the HSX movie market game.
Prediction markets for future events are increasingly common, and they often trade several contra... more Prediction markets for future events are increasingly common, and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that portfolio of contracts even if transactions costs were zero. Because common parametric distributions can con ‡ict with observed prediction market prices, the distribution is given a nonparametric representation together with a prior distribution favoring smooth and concentrated distributions. The paper …nds posterior modal distributions for popular vote shares of the U.S. Presidential candidates in the 100 days leading up to the elections of 1992, 1996, 2000 and 2004, using bid and ask prices on multiple contracts from the Iowa Electronic Markets. On some days the distributions are multimodal or substantially asymmetric. The derived distributions are more concentrated than the historical distribution of popular vote shares in presidential elections, but do not tend to become more concentrated as time to elections diminishes.
In this paper, we document a "play-out" effect in preference reversal experiments. We compare dat... more In this paper, we document a "play-out" effect in preference reversal experiments. We compare data where preferences are elicited using (1) purely hypothetical gambles, (2) played-out, but unpaid gambles and (3) played-out gambles with truth-revealing monetary payments. We ask whether a model of stable preferences with random errors (e.g., expected utility with errors) can explain the data. The model is strongly rejected in data collected using purely hypothetical gambles. However, simply playing-out the gambles, even in the absence of payments, shifts the data pattern so that noisy maximization is no longer rejected. Inducing risk preferences using a lottery procedure, using monetary incentives or both shift the data pattern further so that noisy maximization achieves the best possible fit to the aggregate data. No model could fit the data better. We argue that playout shifts the response pattern by inducing value because subjects can use outcomes to "keep score." Induction or monetary payments create stronger induced values, shifting the pattern further.
Valuations from "prediction markets" reveal expectations about the likelihood of events. "Conditi... more Valuations from "prediction markets" reveal expectations about the likelihood of events. "Conditional prediction markets" reveal expectations conditional on other events occurring. For example, in 1996, the Iowa Electronic Markets (IEM) ran markets to predict the chances that different candidates would become the Republican Presidential nominee. Other concurrent IEM markets predicted the vote shares that each party would receive conditional on the Republican nominee chosen. Here, using these markets as examples, we show how such markets could be used for decision support. In this example, Republicans could have inferred that Dole was a weak candidate and that his nomination would result in a Clinton victory. This is only one example of the widespread potential for using specific decision support markets.
In this paper we present an innovative teaching tool for introductory financial accounting studen... more In this paper we present an innovative teaching tool for introductory financial accounting students that promotes active leaming using methods at the frontier of market research. We describe the implementation of an asset market where students assume the role of traders in order to leam the role of information in price formation. We discuss the pedagogical questions which are addressed in the design of this market, and we relate the responses to questionnaires distributed to students at the end of the quarter. When we control for prior grade point averages (GPAs) of students, we find that those who participate in the market had better classroom performance.
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Papers by Joyce Berg