Prediction Markets Can Be Manipulated

Documented results indicate prediction markets effectively aggregate information and form accurate predictions. This has led to a proliferation of markets predicting everything from the results of elections to a company's sales to movie box office receipts.

Recent research suggests prediction markets are robust to manipulation attacks and resulting market outcomes improve forecast accuracy. However, researchers have presented evidence from the lab indicating that well funded, single minded manipulators can in fact destroy a prediction market's ability to aggregate information.

New research indicates that the usefulness of prediction markets as inputs to decision making may be limited. They have identified a case where manipulators do cause human forecasters to make predictions that are no better than random guessing would generate showing that prediction markets can be manipulated. In fact, the manipulators are so effective that the econometrician observing the market cannot predict the truth more accurately than a coin flip.

The results may help identify when policy makers should rely upon prediction markets. Further research is needed to identify how specific environmental and intuitional factors affect the ability of prediction markets to aggregate information in the presence of attempted manipulation and the strategies employed by manipulators.

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