The Role of Feedback in the Assimilation of Information in Prediction Markets

i Dedicationiv Acknowledgments v List of Tablesx List of Figuresxii 1 Motivations and Research Questions 1 1.1 Motivations 1 1.1.1 Organization Knowledge Management 1 1.1.2 Issues with Sharing Information 2 1.1.3 Wisdom of Crowds 2 1.1.4 Prediction Markets and Organizational Use 6 1.1.5 Accuracy of Prediction markets 7 1.1.6 Limitations of Prediction Markets 7 1.1.7 The Role of Feedback in Markets 8 1.1.8 Motivations of the Research 8 1.2 Research Questions 9 1.2.1 What are the Mechanisms Involved in the Information Assimilation Proce ss? 9 1.2.2 How does the Presence and Type of Feedback impact Market Performance? 9 1.2.3 How do Individuals use Information in the Allocation Process? 9 2 Literature Review, Synthesis and Experimental Hypotheses 11 2.1 Market Background 11 2.1.1 Market Types 11 2.1.2 Information Assimilation Capability of Markets 12 2.1.3 Prediction Markets 18 2.1.4 Experimental Prediction Markets 19 2.2 Individual Decision Processes 23 2.2.1 Overview 23 2.2.2 Judgment Assessment of Probability 24 2.2.3 Decisions Allocation of Resources 29 2.3 Interactions in Markets 33 2.3.1 Rational Markets with Irrational Agents 34 2.3.2 Feedback 35 2.3.3 Systems Theories of markets 40 2.4 Decisions Frameworks in Economics 42 3 Experimental Hypotheses and Methods 44 3.1 Synthesis and Experimental Hypotheses 44 3.1.1 Research Framework and Market Measurements 44 3.1.2 What are the Mechanisms Involved in the Information Assimilation Proce ss? 50 3.1.3 How does the Presence and Type of Feedback impact Market Performance? 53 viii 3.1.4 How do Individuals use Information in the Allocation Process? 55 3.1.5 Summary of Research Hypotheses 57 3.2 Experiment Design 59 3.2.1 Simplified Experimental Prediction Market 60 3.2.2 Random Draw Experiment 63 3.2.3 Mirage Prone Draw Experiment 63 3.3 Survey Implementation 66 3.3.1 Staging in Random Draw Experiment 69 3.3.2 Staging in Mirage Prone Draw Experiment 70 3.4 Research Analysis Overview and Tools 73 3.4.1 Evaluating Draw Sets 73 3.4.2 Understanding Individual Allocations 75 3.4.3 Inferential Tools and Considerations 81 3.5 Potential Limitations of Experimental Methods 82 3.5.1 Sequencing Participants 82 3.5.2 Learning 83 4 Experimental Results 84 4.1 General Considerations 84 4.1.1 Data Collection 84 4.1.2 Demographics 85 4.1.3 Careless Responses 86 4.1.4 Screening 90 4.2 Market Performance with Random Draws 91 4.2.1 Information Collection in Markets with No-feedback 91 4.2.2 Information Aggregation in Markets with Feedback 93 4.2.3 Mirage Tendencies in Feedback Markets 108 4.3 Market Performance under Mirage Prone Conditions 113 4.3.1 Market's Performance with Mirage Prone Draw Sets 113 4.3.2 Evaluation for Information Mirages 119 4.4 Individual Allocations 128 4.4.1 Rounding and Position Bias 128 4.4.2 No-feedback Markets: Allocations vs. Probability 130 4.4.3 Feedback Markets: Influence of Public Data on Allocations 131 4.4.4 Categorizing responses into styles 137 5 Discussion, Conclusions and Next Steps 142 5.1 Conclusions 142 5.1.1 What are the Mechanisms Involved in the Information Assimilation Proce ss? 142 5.1.2 How does the Presence and Type of Feedback Impact Market Performance? 150 5.1.3 How do Individuals use Information in the Allocation Process? 153 5.2 Simulating Markets 162 5.2.1 Simulation Goals 162 5.2.2 Characteristics of Interest 163 5.2.3 Simulator Architecture 165