Innovations in Defense Acquisition: Asymmetric Information, Mechanism Design and Prediction Markets
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Prediction markets, sometimes called information markets, idea markets or event futures, are similar to financial stock markets where the stocks and their prices reflect the consensus view regarding the outcomes of specifically defined future probabilistic events. Prediction markets quickly and efficiently gather and summarize information from a disparate and diverse group of people, providing a two-way information flow; individual traders are informed by the consensus opinion and their market decisions inform the aggregate consensus. The remarkable accuracy of prediction markets in forecasting election results economic outcomes, and other variables has defense managers intrigued by the possibility of applying these markets as a managerial decision tool. Overall implementing prediction markets is straight forward, but in practice the devil is in the details, including security or contact design, trading rules, participation incentives and the number and characteristics of the traders. Small changes in any design element can significantly affect prediction market performance. This research highlights the implementation issues involved in designing and running prediction markets. If improperly designed, prediction markets will be confusing and uninformative, at best. Poorly designed early pilots can portray prediction markets as a flawed concept as opposed to a useful concept with a flawed implementation.
Sponsored Report (for Acquisition Research Program)
RightsThis publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.
NPS Report NumberNPS-AM-11-006
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Prediction Markets: A Review with an Experimentally Based Recommendation for Navy Force-shaping Application Chinn, Michael; Huffman, Leslie (2009-12-16); NPS-AM-09-139Prediction markets generally are small-scale electronic markets that tie payoffs to measurable future events. They are similar to stock markets, in which the ''stocks'' are outcomes or events rather than shares in a company. ...
Prediction markets: a review with an experimentally based recommendation for Navy force-shaping application Chinn, Michael A.; Huffman, Leslie A. (Monterey, California: Naval Postgraduate School, 2009-12);Prediction markets generally are small-scale electronic markets that tie payoffs to measurable future events. They are similar to stock markets, where the "stocks" are outcomes or events rather than shares in a company. ...
Dishmon, Joshua M. (Monterey, California. Naval Postgraduate School, 2011-06);Prediction markets generally are small-scale electronic markets that tie payoffs to measurable future events. They are similar to stock markets, where the "stocks" are outcomes or events rather than shares in a company. ...