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.