PREDICTION MARKETS: ISSUES AND APPLICATIONS

Abstract

This paper explores the design and implementation of prediction markets, markets strategically constructed to aggregate traders’ beliefs about future events.  It posits that prediction markets are particularly useful as forecasting tools where traders are constrained – legally, politically, professionally, or bureaucratically – from directly sharing the information that underlies their beliefs.  It concludes by articulating a possible design for such a market, as an alternative to a Pentagon program that collapsed amid public outcry in 2003.