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Making Profit in a Prediction Market

  • Jen-Hou Chou
  • Chi-Jen Lu
  • Mu-En Wu
Part of the Lecture Notes in Computer Science book series (LNCS, volume 7434)

Abstract

Suppose one would like to estimate the outcome distribution of an uncertain event in the future. One way to do this is to ask for a collective estimate from many people, and prediction markets can be used to achieve such a task. By selling securities corresponding to the possible outcomes, one can infer traders’ collective estimate from the market price if it is updated properly. In this paper, we study prediction markets from the perspectives of both traders and market makers. First, we show that in any prediction market, a trader has a betting strategy which can guarantee a positive expected profit for him when his estimate about the outcome distribution is more accurate than that from the market price. Next, assuming traders playing such a strategy, we propose a market which can update its price to converge quickly to the average estimate of all traders if the average estimate evolves smoothly. Finally, we show that a trader in our market can guarantee a positive expected profit when his estimate is more accurate than the average estimate of all traders if the average estimate again evolves in a smooth way.

Keywords

Market Price Average Belief Outcome Distribution Market Maker Price Vector 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Jen-Hou Chou
    • 1
  • Chi-Jen Lu
    • 1
  • Mu-En Wu
    • 1
  1. 1.Institute of Information ScienceAcademia SinicaTaipeiTaiwan

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