Prediction without markets

Sharad Goel, Daniel M. Reeves, Duncan J. Watts, David M. Pennock
2010 Proceedings of the 11th ACM conference on Electronic commerce - EC '10  
Citing recent successes in forecasting elections, movies, products, and other outcomes, prediction market advocates call for widespread use of market-based methods for government and corporate decision making. Though theoretical and empirical evidence suggests that markets do often outperform alternative mechanisms, less attention has been paid to the magnitude of improvement. Here we compare the performance of prediction markets to conventional methods of prediction, namely polls and
more » ... l models. Examining thousands of sporting and movie events, we find that the relative advantage of prediction markets is surprisingly small, as measured by squared error, calibration, and discrimination. Moreover, these domains also exhibit remarkably steep diminishing returns to information, with nearly all the predictive power captured by only two or three parameters. As policy makers consider adoption of prediction markets, costs should be weighed against potentially modest benefits.
doi:10.1145/1807342.1807400 dblp:conf/sigecom/GoelRWP10 fatcat:sjxrx3ueirbu5j65pv25p5vdvu