Via our good friends at Forecasting Principles
Forrest Nelson, a professor of economics at the University of Iowa, helped to found the Iowa Electronic Markets. He and his colleagues faced considerable push-back from their university’s lawyers in setting up a real-money exchange, but they persevered and eventually were granted “no-action” letters from the Commodity Futures Trading Commission. Why go to all that effort? “Economists think that incentives matter,” he says, noting that when traders use play dollars, “It’s all just matchsticks.”
Nelson does, however, accept the findings of studies showing that the predictions of some play-money markets are just as accurate as their real-money counterparts. But he points out that to get a good answer with play money requires more participants to average out a lot of ill-conceived and extreme positions. Play-money markets, Nelson says, tend to show excessive volatility.
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Prediction Markets: Does Money Matter? – (PDF) – by Emile Servan-Schreiber, David Pennock, Justin Wolfers and Brian Galebach – 2004-09-00
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