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Connections between markets and learning

Connections between markets and learning Connections Between Markets and Learning YILING CHEN Harvard University and JENNIFER WORTMAN VAUGHAN Harvard University & UCLA We provide an overview of recent research exploring the striking mathematical connections that exist between market maker mechanisms for prediction markets and no-regret learning. We describe how these connections can be used in the design of e ƒcient prediction markets over combinatorial outcome spaces. Categories and Subject Descriptors: J.4 [Social and Behavioral Sciences]: Economics; I.2.6 [Arti cial Intelligence]: Learning General Terms: Algorithms, Economics, Theory 1. INTRODUCTION A prediction market is a nancial market designed to aggregate information. In a typical prediction market, the organizer (or market maker ) trades a set of securities, each corresponding to a potential outcome of an event. The market maker might o €er a security that will pay o € $1 if and only if Sarah Palin becomes the U.S. Republican Party presidential nominee in 2012. A risk neutral trader who believes that the probability of Palin winning the nomination is p should be willing to buy a share of this security at any price below $p. Similarly, he should be willing to sell at any price above $p. For this reason, the current market price http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png ACM SIGecom Exchanges Association for Computing Machinery

Connections between markets and learning

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Publisher
Association for Computing Machinery
Copyright
Copyright © 2010 by ACM Inc.
ISSN
1551-9031
DOI
10.1145/1980534.1980540
Publisher site
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Abstract

Connections Between Markets and Learning YILING CHEN Harvard University and JENNIFER WORTMAN VAUGHAN Harvard University & UCLA We provide an overview of recent research exploring the striking mathematical connections that exist between market maker mechanisms for prediction markets and no-regret learning. We describe how these connections can be used in the design of e ƒcient prediction markets over combinatorial outcome spaces. Categories and Subject Descriptors: J.4 [Social and Behavioral Sciences]: Economics; I.2.6 [Arti cial Intelligence]: Learning General Terms: Algorithms, Economics, Theory 1. INTRODUCTION A prediction market is a nancial market designed to aggregate information. In a typical prediction market, the organizer (or market maker ) trades a set of securities, each corresponding to a potential outcome of an event. The market maker might o €er a security that will pay o € $1 if and only if Sarah Palin becomes the U.S. Republican Party presidential nominee in 2012. A risk neutral trader who believes that the probability of Palin winning the nomination is p should be willing to buy a share of this security at any price below $p. Similarly, he should be willing to sell at any price above $p. For this reason, the current market price

Journal

ACM SIGecom Exchanges – Association for Computing Machinery

Published: Jun 1, 2010

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