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Notes from Wolfers and Zitzewitz paper on Prediction Markets

( Prediction Markets )

Here are my notes on the paper, Prediction Markets, by Justin Wolfers and Eric Zitzewitz

Accuracy
Wolfers and Zitzewitz recently published Interpreting Prediction Market Prices as Probabilities that claims that “prediction market prices are usually close to the mean beliefs of traders” and concludes…

with some guidance for practitioners. In most cases we find that prediction market prices aggregate beliefs very well. Thus, if traders are typically well-informed, prediction market prices will aggregate information into useful forecasts. The efficacy of these forecasts may however be undermined somewhat for prices close to $0 or $1,…
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