Aggregating probabilistic beliefs: market mechanisms and graphical representations
Aggregating probabilistic beliefs: market mechanisms and graphical representations
Prediction, Learning, and Games
Prediction, Learning, and Games
| Hi-index | 0.00 |
Consider a prediction market, in which participants can trade shares (binary options) at the current market price pm. Each share is worth $1 if the event occurs, and nothing otherwise. What fraction of your wealth w should you risk if you believe the probability of the event is p? Buying is favorable if p pm, in which case risking your entire wealth will maximize your expected profit with respect to your belief. However, that's extraordinarily risky: A single stroke of bad luck loses everything. On the other hand, risking a small fixed amount cannot take advantage of compounding growth.