Prediction markets are increasingly being considered as methods for gathering, summarizing and aggregating diffuse information by governments and businesses alike. Critics worry that these markets are susceptible to price manipulation by agents who wish to distort decision making. We study the effect of manipulators on an experimental market, and find that manipulators are unable to distort price accuracy. Subjects without manipulation incentives compensate for the bias in offers from manipulators by setting a different threshold at which they are willing to accept trades
It’s not easy to recognize manipulation in free markets (As opposed to experiments), which make evaluating this question a challenge. The question does intuitively ring true to people, which even caused congress to cancel a policy prediction market.
Results suggest that:
- Manipulators try to adjust the price
- Manipulation doesn’t change the information aggregation and actually affect the price
- Non manipulators are wary and accept prices below the manipulation bid.
Results suggest that in an environment where market participants are aware of manipulators and how they will manipulate, participants are more wary and manipulation is less effective.
Caveats: These are results drawn on a small group of participants whom all have equal amounts of capital.