Prediction Markets as Decision Support Systems.pdfVIP

Information Systems Frontiers 5:1, 79–93, 2003 C 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. Prediction Markets as Decision Support Systems Joyce E. Berg Department of Accounting, Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52242-1000, USA Thomas A. Rietz∗ Department of Finance, Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52242-1000, USA E-mail: Thomas-Rietz@ Abstract. Valuations from “prediction markets” reveal expec- such markets are efficient advance forecasts of the vote tations about the likelihood of events. “Conditional prediction shares ultimately received. Depending on the contract markets” reveal expectations conditional on other events occur- payoff structure, market values can convey informa- ring. For example, in 1996, the Iowa Electronic Markets (IEM) ran markets to predict the chances that different candidates would tion about nearly any event that will be determined by become the Republican Presidential nominee. Other concurrent a measurable future outcome. IEM markets predicted the vote shares that each party would re- Here, we define “conditional prediction markets” ceive conditional on the Republican nominee chosen. Here, using as those run for the primary purpose of making predic- these markets as examples, we show how such markets could be tions about fut