Predictive Power of Markets

Accurate predictions are essential in many areas such as business and sports forecasting. Prediction markets are a promising approach for predicting uncertain future events and developments. To give a few examples, prediction markets have been employed successfully to aggregate information on the expected outcome of elections, sports events, and Oscar winners. This work studies the prediction accuracy of markets in the field of sports forecasting as well as the impact of traders’ biases on their trading behavior. Traders indeed exhibit a substantial amount of biases in markets which were run for predicting the outcome of the FIFA World Cup 2006. Despite these biases, an empirical comparison of the markets and predictions derived from the FIFA world ranking, i.e. historic data, and betting odds shows that prediction markets are more accurate predictors than the FIFA world ranking and as accurate as betting odds from professional bookmakers. Betting odds, in turn, are known to predict extremely accurately. Traders’ biases thus do not necessarily lead to poor predictions in case of