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Prediction markets have to occasionally “get it wrong” to be calibrated – Decision Science News

See on Scoop.itBounded Rationality and Beyond

Two recent events in the UK made it look like prediction markets’ predictions aren’t worth much. The soccer team Leicester City won the premiere league title despite the markets putting the odds of them doing so at 5,000 to 1 (.02%). Last week, people in the UK, voted to leave the European Union. A few hours before it was sure they would exit, a prediction market put their probability of leaving at 10%. See the figure above from PredictIt. X axis is roughly time before the outcome was certain. Y axis can be interpreted as probability of exit (70 cents = 70%). It jumped from 10% to 90% in just five hours. Analysts like to “explain” market results, coming up with a reason why an event was a failure of the prediction market. For instance, in the two events above, the Wall Street Journal, perhaps correctly, claims the bets were unduly influenced by London bettors. Through big London bets the odds moved to reflect what Londoners believe instead of the sentiment of the crowd. In predicting a Brexit, the sentiment of the crowd is exactly what you want. Whenever the prediction market is far on the wrong side of 50%, explanations will arise as to why the prediction market was wrong. Let’s take a step back here.

See on decisionsciencenews.com

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