Pari-mutuel Information Aggregation Mechanisms

Abstract

A number of experimental studies have found that pari-mutuel markets possess the ability to aggregate information privately held by individuals and therefore act as prediction markets.  However, all previous studies have assumed that information is privately and independently distributed. In real world environments the distribution of information is unlikely to take this form. This paper investigates, experimentally, an information structure in which there is both private and public information. It is found that this structure induces a ‘public knowledge bias’ which limits the market’s ability to aggregate information to the extent that the public information reduces the market’s predictive performance.The authors wish to thank Murali Agastya, Andrew Coleman, Pablo Guillen, Stefan Palan, Charles Plott, Kunal Sengupta, and Robert Slonim for useful comments and technical assistance.  We are also extremely grateful to Katarina Kálovcová and Andreas Ortmann for supplying their Ztree program for use in developing our own.