Prediction Markets

Instructor: Tyler Cowen, George Mason University

We’ve discussed how prices are signals that convey information about goods — but can prices also convey information about events and even predict the future? For

We’ve discussed how prices are signals that convey information about goods — but can prices also convey information about events and even predict the future? For instance, can we predict Middle East politics based on the price of oil futures? Or predict the consequences of climate change based on the price of flood insurance in coastal cities? Of course, prices in these examples are imperfect predictors as there are many factors that influence the price.

We also take a look at some markets that have been designed to make predictions, like the Iowa Electronic Markets, and a specific example of how it was used to predict the outcome of the 2008 presidential election between John McCain and Barack Obama. What about the Hollywood Stock Exchange, where traders buy and sell shares and options in movies and music? What did the studio learn about its casting choices for the film, “50 Shades of Grey”? We discuss these examples and more in this video.

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Since Andy is selling he makes the difference rather than paying the difference/

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