Gaming Prediction Markets: Equilibrium Strategies with a Market Maker

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Gaming Prediction Markets: Equilibrium Strategies with a Market Maker

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Title: Gaming Prediction Markets: Equilibrium Strategies with a Market Maker
Author: Chen, Yiling; Dimitrov, Stanko; Sami, Rahul; Reeves, Daniel; Pennock, David; Fortnow, Lance; Gonen, Rica; Hanson, Robin

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Citation: Chen, Yiling, Stanko Dimitrov, Rahul Sami, Daniel M. Reeves, David M. Pennock, Robin D. Hanson, Lance Fortnow and Rica Gonen. 2009. Gaming prediction markets: equilibrium strategies with a market maker. Algorithmica 58(4): 930-969.
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Abstract: We study the equilibrium behavior of informed traders interacting with market scoring rule (MSR) market makers. One attractive feature of MSR is that it is myopically incentive compatible: it is optimal for traders to report their true beliefs about the likelihood of an event outcome provided that they ignore the impact of their reports on the profit they might garner from future trades. In this paper, we analyze non-myopic strategies and examine what information structures lead to truthful betting by traders. Specifically, we analyze the behavior of risk-neutral traders with incomplete information playing in a dynamic game. We consider finite-stage and infinite-stage game models. For each model, we study the logarithmic market scoring rule (LMSR) with two different information structures: conditionally independent signals and (unconditionally) independent signals. In the finite-stage model, when signals of traders are independent conditional on the state of the world, truthful betting is a Perfect Bayesian Equilibrium (PBE). Moreover, it is the unique Weak Perfect Bayesian Equilibrium (WPBE) of the game. In contrast, when signals of traders are unconditionally independent, truthful betting is not a WPBE. In the infinite-stage model with unconditionally independent signals, there does not exist an equilibrium in which all information is revealed in a finite amount of time. We propose a simple discounted market scoring rule that reduces the opportunity for bluffing strategies. We show that in any WPBE for the infinite-stage market with discounting, the market price converges to the fully-revealing price, and the rate of convergence can be bounded in terms of the discounting parameter. When signals are conditionally independent, truthful betting is the unique WPBE for the infinite-stage market with and without discounting.
Published Version: doi:10.1007/s00453-009-9323-2
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:5027877

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  • FAS Scholarly Articles [6948]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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