Information Asymmetry And Manipulation In Prediction Markets:an Experimental Study

Without doubt, Efficient Markets Hypothesis has become the most important foundation of the modern financial theories since the day Eugene Fama presented it. Its essential idea is that rational investors can form expectations of future cash flow unbiasedly. thus information about assets can quickly disseminates from different traders to each other. By doing so, the market price can reflect the true value of the assets. Especially, more and more evidence suggest a single security market can achieve the results of EMH much more easily. The capacity to collect information and publish it makes market a powerful tool. Prediction markets are incentive-based mechanisms designed to pool information about future events. They can help enterprises to make decisions and to design better products. Even political elections can use prediction markets to predict. In this paper. we use experimental markets to test prediction markets’ capacity to collect information and how they perform when manipulators are introduced. First, we find that the information asymmetry could reduce bubbles only when the markets knows the presence of insiders. In this situation. insiders will fight more fiercely for the opportunities of excess returns. By doing so, they offer the market an extra liquidity inadvertently and make the price reflect private information more quickly. Secondly, prediction markets have strong resistances toward manipulation, whether it’s based on information or trades. It’s partly due to the fact that the endowments of the participants are identical and therefore no one can change the market individually, and partly because the extra liquidity that the factors mentioned before can brought, despite the fact that prediction markets have very simple structure.