Archive for 'Advantages'
Reduction of Heuristics and Biases
Consistent reporting of prediction market predictions and trends could demystify the sports pages, reducing events that require much attention today to mere blips on a market chart. Some prediction markets on TradeSports, for example, predict not the result of individual games but the outcome of entire seasons. For example, before the beginning of the Major […]
Aggregation of Secret Information
In all of these cases, the information that is relevant to the task is largely public, so the markets would be performing assessment aggregation. Some contexts, however, might lend themselves to sophisticated modeling more than would others, and to the extent that the predictions of sophisticated models count as private information, these markets might perform […]
Reduction of Optimism Bias and Wishful Thinking
Cognitive psychologists have in a wide range of experiments demonstrated the presence of optimism bias, sometimes called “wishful thinking” or the “valence effect.” Research has shown that, excluding the depressed, individuals rate themselves more highly than other people perceive them.5 People also generally view themselves as less vulnerable to certain risks, such as getting cancer,6 […]
Hedging Risk
An important function of commodity markets is to provide a mechanism for reducing risk. Some businesses purchase frozen concentrated orange juice a long time in advance because they can be harmed by price increases, and they do not want to worry about the need to obtain liquidity at the last minute if orange juice prices […]
Overcoming the Tradeoff Between Rules and Standards
Perhaps the most fundamental choice in a legal regime is that between rules and standards. For example, in statistical analysis, a rule might be “reject the null hypothesis if the numbers are not significant at the .05 level”; a standard might be “reject the null hypothesis when the observed event is improbable.” A simple legal […]
Reduction of Ideological Decision Making
The presence of ideology in government is so commonplace that we often assume that it is unproblematic, perhaps even a virtue of democratic government. If the people pick a Republican president, then we have administrative agencies with a Republican agenda, and if they vote Democratic, then we have a Democratic agenda. That’s democracy. Indeed, but […]
Reduction of Influence of Special Interests
These markets might also be used to constrain not only ideological decision making but also interested decision making. The claim that special interests receive undue benefits from government is as old as government itself. Solutions, however, are elusive. The most frequently mentioned approaches to solving the problem are campaign contribution limits and disclosure requirements. Contribution […]
Avoidance of the Time Inconsistency Problem
In addition to guarding against the temptation to provide benefits to private interests, normative prediction markets also can be useful in guarding against the temptation to deviate from commitments. In 2004, Finn Kydland and Edward Prescott won the Nobel Prize in Economics in large part because of their work on what is known as the […]
Reduction in Agency Costs
Thomas Malone, in his book The Future of Work, has identified the prediction market as one of a number of mechanisms that allow managers to take advantage of decentralized decision making rather than relying solely on their own normative lights.1 If the predictions that are of interest to businesses are useful bases on which […]
Improving Market Efficiency
An alternative approach to improving corporate decision making is to seek to reduce information asymmetries using prediction markets. There are circumstances, of course, in which corporations want to keep certain information secret and therefore do not want to use prediction markets that might reveal the information. For example, a company might not want to have […]