Betting strategies, market selection, and the wisdom of crowds

Willemien Kets*, Rajiv Sethi, David M. Pennock, Nisarg Shah

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contribution

3 Scopus citations

Abstract

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.

Original languageEnglish (US)
Title of host publicationProceedings 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
PublisherAI Access Foundation
Pages735-741
Number of pages7
ISBN (Electronic)9781577356776
StatePublished - Jan 1 2014
Event28th 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 - Quebec City, Canada
Duration: Jul 27 2014Jul 31 2014

Publication series

NameProceedings of the National Conference on Artificial Intelligence
Volume1

Other

Other28th 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
CountryCanada
CityQuebec City
Period7/27/147/31/14

ASJC Scopus subject areas

  • Software
  • Artificial Intelligence

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