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Risk aversion in prediction markets: A framed-field experiment

Author

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  • Béatrice Boulu-Reshef

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Irene Comeig
  • Robert Donze
  • Gregory D. Weiss

Abstract

To make better decisions today, companies and other economic agents are interested in getting accurate predictions of future events. Prediction markets can, at least potentially, give those accurate forecasts for the probability of the event by aggregating information from traders. However, formal studies highlight that the risk attitudes of market participants may bias the market equilibrium prices, and consequently make the prediction unreliable. This research examines the effect of participants' risk attitudes on prediction market prices, through a framed field experiment on the two semifinals at the 2015 NCAA Men's Division Basketball Tournament. The results of the experiment show a significant price difference between the risk-averse group and the less risk-averse group. The large price discrepancy between markets with participants with varying risk aversion suggests that risk aversion deserves a critical consideration in future prediction-market research and implementation.

Suggested Citation

  • Béatrice Boulu-Reshef & Irene Comeig & Robert Donze & Gregory D. Weiss, 2016. "Risk aversion in prediction markets: A framed-field experiment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01368197, HAL.
    • Handle: RePEc:hal:cesptp:hal-01368197
    DOI: 10.1016/j.jbusres.2016.04.082
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