PREDICTING UNCERTAIN OUTCOMES USING INFORMATION MARKETS: TRADER BEHAVIOR AND INFORMATION AGGREGATION

Abstract

Forecasting seems to be a ubiquitous endeavor in human societies. In this paper, information markets are introduced as a promising mechanism for predicting uncertain outcomes. Information markets are markets that are specially designed for aggregating information and making predictions on future events. A generic model of information markets is proposed. We derive some fundamental properties on when information markets can converge to the direct communications equilibrium, which aggregates all information across traders and is the best possible prediction for the event under consideration. Information markets, if properly designed, have substantial potential to facilitate organizations in making better informed decisions.