An Empirical Investigation of the Forecast Accuracy of Play-Money Prediction Markets and Professional Betting Markets

Prediction markets have proven high forecasting performance in many areas such as politics, sports and business-related fields compared to traditional instruments such as polls or expert opinions. The advantage of real-money prediction markets is to provide participants with a clear incentive to reveal their true opinion on the outcome of an event. However, it is to date unclear whether play-money prediction markets, where participants cannot suffer any losses, perform well compared to other, more strongly incentivized instruments. Thus, the goal of this paper is to compare the forecast accuracy of play-money prediction markets with that of instruments with a monetary incentive to make as accurate predictions as possible, namely fixed-odds betting. We present the results of an empirical study that compares the forecast accuracy of a play-money prediction market for the FIFA World Cup 2006 to predictions derived from odds issued by two professional betting companies. Additionally, we compare the prediction market with two more benchmarks, namely the FIFA world ranking which is based on historic data and a random predictor. We find that the play-money prediction markets for the FIFA World Cup are about as accurate as betting markets. Moreover, the prediction markets clearly outperform the FIFA world ranking as well as the random predictions.