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State-dependent Preferences in Prediction Markets and Prices as Aggregate Statistic

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  • Urmee Khan

    (Department of Economics, University of California Riverside)

Abstract

If traders in prediction markets have state-dependent preferences so that marginal utility of money varies across states, prices in a Rational Expectation equilibrium are quantile statistics of distributions that de- rive from both the distribution of realized signals, and the distribution of state-dependence parameters. As a result, even with a common prior and regardless of whether prices reveal realized signals fully or not, the interpretation of prices as posterior probabilities remains problematic.

Suggested Citation

  • Urmee Khan, 2016. "State-dependent Preferences in Prediction Markets and Prices as Aggregate Statistic," Working Papers 201609, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:201609
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    File URL: https://economics.ucr.edu/repec/ucr/wpaper/201609.pdf
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    References listed on IDEAS

    as
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    5. Marco Ottaviani & Peter Norman Sørensen, 2007. "Outcome Manipulation in Corporate Prediction Markets," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 554-563, 04-05.
    6. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," IZA Discussion Papers 2092, Institute of Labor Economics (IZA).
    7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    Keywords

    Prediction markets; information aggregation; state-dependent preferences;
    All these keywords.

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