The mechanisms of information integration in experimental prediction markets

The desire to understand the mechanisms of market information integration motivates this study. Large sample experimental prediction markets with varying feedback mechanisms afforded the study of aggregate and individual’s actions. Markets without feedback demonstrated information collection by outperforming the average of their participants. When feedback was introduced the inductive process of information aggregation was observed. This process was seen to simultaneously increase the amount of information assimilated, but also introduce information mirages which tend to decrease the accuracy of the markets – being dependent on the type of data presented to the market. In fact, a market subject to mirage prone data resembles a prisoner’s dilemma where individual rationality results in collective irrationality. Individual’s responses with feedback revealed characteristics of public and private information integration. Integration for individuals was subtle compared to the more distinct effect in markets, illustrating the emergent nature of information aggregation in markets.