A Strategic Model for Information Markets

Information markets, which are designed specifically to aggregate traders' information, are becoming increasingly popular as a means for predicting future events. Recent research in information markets has resulted in two new designs, market scoring rules and dynamic parimutuel markets. We develop an analytic method to guide the design and strategic analysis of information markets. Our central contribution is a new abstract betting game, the projection game, that serves as a useful model for information markets. We demonstrate that this game can serve as a strategic model of dynamic parimutuel markets, and also captures the essence of the strategies in market scoring rules. The projection game is tractable to analyze, and has an attractive geometric visualization that, makes the strategic moves and interactions more transparent. We use it to prove several strategic properties about the dynamic parimutuel market. We also prove that a special form of the projection game is strategically equivalent to the spherical scoring rule, and it is strategically similar to other scoring rules. Finally, we illustrate two applications of the model to analysis of complex strategic scenarios: we analyze the precision of a market in which traders have inertia, and a market in which a trader can profit by manipulating another trader's beliefs.