TY - GEN
T1 - Betting strategies, market selection, and the wisdom of crowds
AU - Kets, Willemien
AU - Sethi, Rajiv
AU - Pennock, David M.
AU - Shah, Nisarg
PY - 2014/1/1
Y1 - 2014/1/1
N2 - We investigate the limiting behavior of trader wealth and prices in a simple prediction market with a finite set of participants having heterogeneous beliefs. Traders bet repeatedly on the outcome of a binary event with fixed Bernoulli success probability. A class of strategies, including (fractional) Kelly betting and constant relative risk aversion (CRRA) are considered. We show that when traders are willing to risk only a small fraction of their wealth in any period, belief heterogeneity can persist indefinitely; if bets are large in proportion to wealth then only the most accurate belief type survives. The market price is more accurate in the long run when traders with less accurate beliefs also survive. That is, the survival of traders with heterogeneous beliefs, some less accurate than others, allows the market price to better reflect the objective probability of the event in the long run.
AB - We investigate the limiting behavior of trader wealth and prices in a simple prediction market with a finite set of participants having heterogeneous beliefs. Traders bet repeatedly on the outcome of a binary event with fixed Bernoulli success probability. A class of strategies, including (fractional) Kelly betting and constant relative risk aversion (CRRA) are considered. We show that when traders are willing to risk only a small fraction of their wealth in any period, belief heterogeneity can persist indefinitely; if bets are large in proportion to wealth then only the most accurate belief type survives. The market price is more accurate in the long run when traders with less accurate beliefs also survive. That is, the survival of traders with heterogeneous beliefs, some less accurate than others, allows the market price to better reflect the objective probability of the event in the long run.
UR - http://www.scopus.com/inward/record.url?scp=84908205781&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84908205781&partnerID=8YFLogxK
M3 - Conference contribution
AN - SCOPUS:84908205781
T3 - Proceedings of the National Conference on Artificial Intelligence
SP - 735
EP - 741
BT - Proceedings of the 28th AAAI Conference on Artificial Intelligence and the 26th Innovative Applications of Artificial Intelligence Conference and the 5th Symposium on Educational Advances in Artificial Intelligence
PB - AI Access Foundation
T2 - 28th AAAI Conference on Artificial Intelligence, AAAI 2014, 26th Innovative Applications of Artificial Intelligence Conference, IAAI 2014 and the 5th Symposium on Educational Advances in Artificial Intelligence, EAAI 2014
Y2 - 27 July 2014 through 31 July 2014
ER -