Incentives in prediction markets

Prediction markets are powerful devices to forecast outcomes of future events. Information from the public domain is gradually absorbed into contract prices that directly translate into likelihoods of future events. The importance of monetary incentives on the aggregation of the traders' beliefs is not yet well understood. By conducting time series analysis on four prediction markets covering the 2008 presidential election in the U.S., we find that the trends for play-money and real-money markets fail to co-move for a substantial portion of the traded contracts, despite of the presence of a market maker who aligns trades between the two markets.