Prediction markets and the financial "wisdom of crowds"

Abstract

This paper examines a new genre of behavioral markets—“prediction” markets—and their remarkable ability to flush out and thereafter aggregate inside and expert information regarding interest rates, exchange rates, inflation rates, stock prices, commodity prices, and many other economic and financial variables. Comprehensive studies of these markets have found that these markets have “proven to be uncannily accurate in predicting all types of events.” Existing in cyberspace and being unregulated, these markets are, arguably, the most efficient financial markets in history.