Gaming Prediction Markets: Equilibrium Strategies with a Market Maker

We study the equilibrium behavior of informed traders interacting with market scoring rule (MSR) market makers. One attractive feature of MSR is that it is myopically incentive compatible: it is optimal for traders to report their true beliefs about the likelihood of an event outcome provided that they ignore the impact of their reports on the profit they might garner from future trades. In this paper, we analyze non-myopic strategies and examine what information structures lead to truthful betting by traders. Specifically, we analyze the behavior of risk-neutral traders with incomplete information playing in a dynamic game. We consider finite-stage and infinite-stage game models. For each model, we study the logarithmic market scoring rule (LMSR) with two different information structures: conditionally independent signals and (unconditionally) independent signals. In the finite-stage model, when signals of traders are independent conditional on the state of the world, truthful betting...

• Type: Journal
• Year: 2010
• Where: ALGORITHMICA
• Authors: Yiling Chen, Stanko Dimitrov, Rahul Sami, Daniel M. Reeves, David M. Pennock, Robin D. Hanson, Lance Fortnow, Rica Gonen
• Keywords: ALGORITHMICA 2010, Independent Signals, Market, Perfect Bayesian Equilibrium