Predicting the Prediction Market:Would Smart Agents Help?

When market works and when it fails has been an issue long pursued by economists. While to an extreme extent the view, as characterized by the “invisible hand” or “market mechanism”, has been so dominant in economics education and public policy debates, it is generally acceptable that markets are not out there and have to designed properly so as to work (McMillan, 2004). The significance of designs has been further illustrated by experimental economics. As opposed to designs, what, however, has been drawn less attention is the role of traders, their characteristics and behavior. To one extreme, one may consider that a good design is so dominant that there leaves little room for individual traders to play a role. The literature inspired by the zero-intelligence agent (Gode and Sunder, 1993) provides a good background of this issue, and many later studies do cast doubt on the sufficiency of this minimal intelligence and propose different versions of additional intelligence.