Gaming Prediction Markets: Equilibrium Strategies with a Market Maker

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Gaming Prediction Markets: Equilibrium Strategies with a Market Maker

Show simple item record Chen, Yiling Dimitrov, Stanko Sami, Rahul Reeves, Daniel Pennock, David Fortnow, Lance Gonen, Rica Hanson, Robin 2011-07-19T15:25:54Z 2009
dc.identifier.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. en_US
dc.identifier.issn 0178-4617 en_US
dc.description.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. en_US
dc.description.sponsorship Engineering and Applied Sciences en_US
dc.language.iso en_US en_US
dc.publisher Springer-Verlag en_US
dc.relation.isversionof doi:10.1007/s00453-009-9323-2 en_US
dash.license OAP
dc.subject prediction markets en_US
dc.subject game theory en_US
dc.subject bluffing en_US
dc.subject strategic betting en_US
dc.title Gaming Prediction Markets: Equilibrium Strategies with a Market Maker en_US
dc.type Journal Article en_US
dc.description.version Accepted Manuscript en_US
dc.relation.journal Algorithmica en_US Chen, Yiling 2011-07-19T15:25:54Z

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