Corporate Prediction Markets: Evidence from Google, Ford, and Firm X

Despite the popularity of prediction markets among economists, businesses and policymakers have been slow to adopt them in decision making. Most studies of prediction markets outside the lab are from public markets with large trading populations. Corporate prediction markets face additional issues, such as thinness, weak incentives, limited entry and the potential for traders with ulterior motives – raising questions about how well these markets will perform. We examine data from prediction markets run by Google, Ford and Firm X (a large private materials company). Despite theoretically adverse conditions, we find these markets are relatively efficient, and improve upon the forecasts of experts at all three firms by as much as a 25% reduction in mean squared error. The most notable inefficiency is an optimism bias in the markets at Google and Ford. The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets’ efficiency improves because traders gain experience and less skilled traders exit the market.

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This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.