Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets (original) (raw)
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Information aggregation and belief elicitation in experimental parimutuel betting markets
Journal of Economic Behavior & Organization, 2012
This paper studies the impact of belief elicitation on informational efficiency and individual behavior in experimental parimutuel betting markets. In one treatment, groups of eight participants, who possess a private signal about the eventual outcome, play a sequential betting game. The second treatment is identical, except that bettors are observed by eight other participants who submit incentivized beliefs about the winning probabilities of each outcome. In the third treatment, the same individuals make bets and assess the winning probabilities of the outcomes. Market probabilities more accurately reflect objective probabilities in the third than in the other two treatments. Submitting beliefs reduce the favorite-longshot bias and making bets improves the accuracy of elicited beliefs. A level-k framework provides some insights about why belief elicitation improves the capacity of betting markets to aggregate information.
Parimutuel betting under asymmetric information
This paper examines finite parimutuel betting games with asymmetric information, with particular attention to differences between sequential and simultaneous settings, and between fully rational and myopic ("price taking") behavior. In the simultaneous parimutuel market, all (symmetric and asymmetric) Bayesian-Nash equilibria are generically characterized depending on the number of bettors and the quality of their private information. There always exists a separating equilibrium, where all bettors follow their private signal. This equilibrium becomes unique as the number of bettors increases, and it corresponds to the strategy profile used by myopic bettors. In the sequential framework, the perfectly revealing equilibrium disappears as the number of betting periods increases, whether or not bettors fully anticipate their impact on future odds. In both cases (rational and myopic betting), due to the interaction between information externalities generated by observational learning and payoff externalities generated by betting odds, bettors arbitrate between following their private signal, following the choices of previous bettors, and betting against the trend. Extreme effects based on herd behavior occur in identifiable states of the world, leading to significant short run mispricing.
The mechanisms of information integration in experimental prediction markets
International Journal of Economics and Business Research, 2015
The desire to understand the mechanisms of market information integration motivates this study. Large sample experimental prediction markets with varying feedback mechanisms afforded the study of aggregate and individual's actions. Markets without feedback demonstrated information collection by outperforming the average of their participants. When feedback was introduced the inductive process of information aggregation was observed. This process was seen to simultaneously increase the amount of information assimilated, but also introduce information mirages which tend to decrease the accuracy of the markets-being dependent on the type of data presented to the market. In fact, a market subject to mirage prone data resembles a prisoner's dilemma where individual rationality results in collective irrationality. Individual's responses with feedback revealed characteristics of public and private information integration. Integration for individuals was subtle compared to the more distinct effect in markets, illustrating the emergent nature of information aggregation in markets.
Sequential Betting Behavior: A Test of Asymmetric Inconsistencies in Group Decision Making
Psychology and Marketing
Previous research has shown that individual decision makers tend to bet more than initially planned after experiencing a loss but not after a gain. This research tests whether groups in consensus decision‐making contexts also demonstrate similar asymmetric inconsistencies. Two experiments, one at the individual level and one with three‐person groups, were carried out based on a gambling‐type betting task. Although individuals planned more conservatively than groups regarding their betting behavior after the first outcome, both individuals and groups misestimated their own betting behavior after losses but not after gains. Negative, but not positive, emotional reactions to previous decision outcomes were also misestimated, leading to incorrect predictions of future behavior. Implications for theory and future research are discussed.
Betting Interpretation and the Problem of Interference
We propose to consider a fundamental problem for the betting interpretation of degrees of belief (BI): The odds on which we are willing to bet do not reflect our current unconditional degrees of belief in various propositions. Whether a bet on A would be accepted or not does not depend on the agent’s degree of belief in A but rather on the degree of belief she would have if she were confronted with this bet proposal, or – more generally – the degree of belief she would have if she were in a position to bet on A. Assuming the conditionalization model for belief change, this means that whether the agent would be willing to bet depends on her current conditional beliefs concerning A on the supposition that she has an opportunity to make this bet. Furthermore, her disposition to bet also depends on the expected effects the act of betting would have on the truth of the proposition to be betted on. Both these phenomena imply that finding oneself in a betting situation might interfere with one’s expectations in important ways. Consequently, the identification of (unconditional) degrees of belief with betting rates is a mistake. This is a short version of our joint paper " The Interference Problem for the Betting Interpretation of Degrees of Belief " , which has been published in Synthese.
Persistence of Beliefs in an Investment Experiment
A number of behavioral finance theories posit that investors adhere to prior beliefs in spite of new information. This paper reports the results of an investment experiment which shows that subjects' inferences are biased by their prior beliefs in a manner that depends on investment outcomes. Specifically, their perception of new information was more positively biased for their prior favored assets when incurring losses than gains.
How to Be IncoherentandSeductive: Bookmakers' Odds and Support Theory
Organizational Behavior and Human Decision Processes, 1997
Support theory (Tversky and Koehler, 1994) implies that different descriptions of the same event can prompt different subjective probabilities. More explicit descriptions are assumed to enable retrieval of stronger evidence prompting a higher subjective likelihood. In this paper bookmakers' odds are examined in relation to this hypothesis. British bookmakers quote odds for victory, draw, or loss for football teams and also for more specific components such as the actual score of the game. Consistent with support theory, bookmakers' odds for general hypotheses are subadditive; they are smaller than the sum of the odds given to an explicitly unpacked, but extensionally equivalent, disjunction of events subsumed by the general hypothesis. The extent of the subadditivity increases for hypotheses unpacked into a larger number of components. However, although support theory implies that probabilities for explicitly presented disjunctions of events should be additive, the sum of the odds given to race horses increases with the number of horses in the race. These findings are discussed in relation to other evidence for non-additivity.
Synthese, 2017
This paper examines the preference-based approach to the identification of beliefs. It focuses on the main problem to which this approach is exposed, namely that of state-dependent utility. First, the problem is illustrated in full detail. Four types of state-dependent utility issues are distinguished. Second, a comprehensive strategy for identifying beliefs under state-dependent utility is presented and discussed. For the problem to be solved following this strategy, however, preferences need to extend beyond choices. We claim that this a necessary feature of any complete solution to the problem of state-dependent utility. We also argue that this is the main conceptual lesson to draw from it. We show that this lesson is of interest to both economists and philosophers.