Predictive Markets
Experimental economics can be used to predict the outcome of
a future event. In this system, there is one market for each
of the possible outcomes of the event. If the outcome is a number,
then each market is a range of numbers that will contain the outcome.
Subjects buy and sell shares in each of the markets.
When the final outcome is known, subjects are paid a dividend for
each share that they hold in the market corresponding to the outcome.
Shares in all other markets pay nothing.
The trading prices of shares in each market represent a probability
distribution of the possible outcomes.
This is an animation of the trading prices in an experiment to
predict a sales figure. The dividend for shares in the winning market
is 100.