An experimental test of combinatorial information markets

Abstract

While a simple information market lets one trade on the probability of each value of a single variable, a full combinatorial information market lets one trade on any combination of values of a set of variables, including any conditional or joint probability. In laboratory experiments, we compare the accuracy of simple markets, two kinds of combinatorial markets, a call market and a market maker, isolated individuals who report to a scoring rule, and two ways to combine those individual reports into a group prediction. We consider two environments with asymmetric information on sparsely correlated binary variables, one with three subjects and three variables, and the other with six subjects and eight variables (thus 256 states).