Does information economics apply to prediction markets?

No Gravatar

Who is Paul Hewitt&#8230- and what the hell is &#8220-information economics&#8221-&#8230-!??&#8230-


About Paul S. Hewitt, B.Comm, CA

I am a Chartered Accountant with a public practice in Toronto, Canada. While much of my work involves personal and corporate income tax, my practice consults with corporations to improve their business planning processes. I am a graduate of the University of Toronto, with a B.Comm degree, but this is somewhat misleading. A significant portion of my course load was focused on economics, and in particular, information economics. Then, it was a relatively new branch of economics, and it had yet to become overly bogged down by theoretical calculus! In short, it was fun. I wrote an undergraduate thesis: “A New Theory of the Economics of Discrimination.”

Then, I moved on to the corporate world, obtaining my CA designation while working at Price Waterhouse in Toronto. Several years later, I branched out on my own, developing a public practice primarily focused on tax consulting.

&#8220-Information Economics&#8221-:

Information economics or the economics of information is a branch of microeconomic theory that studies how information affects an economy and economic decisions. Information has special characteristics. It is easy to create but hard to trust. It is easy to spread but hard to control. It influences many decisions. These special characteristics (as compared with other types of goods) complicate many standard economic theories.

The subject is treated under Journal of Economic Literature classification code JEL D8 – Information, Knowledge, and Uncertainty. The present article reflects topics included in that code. There are several subfields of information economics. The first insights in information economics related to the economics of information goods. In recent decades, there have been influential advances in the study of information asymmetries and their implications for contract theory. Finally, with the rise of computers, economists have begun to study economics of information technology.

The starting point for economic analysis is the observation that information has economic value because it allows individuals to make choices that yield higher expected payoffs or expected utility than they would obtain from choices made in the absence of information.

I like that. For those interested in more, Paul tells me that the Toronto Public Library has freed some academic papers on information economics. E-mail him for more info.

Does information economics apply to prediction markets?

  1. Information generated by our prediction markets is easy to create but hard to trust.
  2. The market-generated predictions are easy to spread but hard to control.
  3. They influence many decisions.

I think that only #2 is true &#8212-and #1 is half true (although I could also say it is true, too, I am not really sure about that one). The fact that #3 is untrue infirms the Hanson approach. Your comments?

2 thoughts on “Does information economics apply to prediction markets?

  1. Bentley207B said:

    Many journal papers can be found at This is the site that I access from the Toronto Public Library (but you need a membership card). This site can be accessed from most universities, and many public libraries, and a few larger organizations. It is invaluable for research.

    As for #3, it is true. Even “bad” information influences decisions. Information imperfections (asymmetries) affect decision-making. Information always affects decisions. As it was explained to me, many years ago, information economics is the study of microeconomic phenomena where information is not “perfect”. Neoclassical economics relies on the assumption of perfect information. Information economics looks at what happens when information is not perfect.

    #2 says that it will be difficult to make money from better decisions, unless you are able to keep the predictions for private use. Same concept applies to a superior stock trading system. As soon as you let others in on the secret, it stops working.

    #1: I’m sure it applies, but I’m not sure how!

  2. Chris F. Masse said:

    #3 – Prediction market prices/probabilities do *not* influence any decisions.

    #2 – What about manipulations? “Control” would seem to refer to that.

Leave a Reply

Your email address will not be published. Required fields are marked *