Prediction Markets: Does Money Matter? 
Emile Servan-Schreiber, Justin Wolfers, David M. Pennock, Brian Galebach 

ABSTRACT: The accuracy of prediction markets has been documented for both 
markets based on real money and those based on play money. To test how much 
extra accuracy can be obtained by using real money versus play money, we set 
up a real-world on-line experiment pitting the predictions of 
TradeSports.com (real money) against those of NewsFutures.com (play money) 
regarding American Football outcomes during the fall-winter 2003-2004 NFL 
season. As expected, both types of markets exhibited significant predictive 
powers, and remarkable performance compared to individual humans. Perhaps 
more surprisingly, the play-money markets performed as well as the 
real-money markets. We speculate that this result reflects two opposing 
forces: real-money markets may better motivate information discovery while 
play-money markets may yield more efficient information aggregation. 


Prediction markets also called “idea futures” or “information markets”are 
designed to aggregate information and produce predictions about future 
events: for example, a political candidate’s re-election, or a box-office 
take, or the probability that the Federal Reserve will increase interest 
rates at its next meeting. To elicit such predictions, contract payoffs are 
tied to unknown future event outcomes. For example, a contract might pay 
$100 if George W. Bush is re-elected in 2004, or nothing if he is not. Thus, 
until the outcome is decided, the trading price reflects the traders’ 
collective consensus about the expected value of the contract, which in this 
case would be proportional to the probability of Bush’s re-election. 

Such markets have been available on-line to the general public since the 
mid-1990’s, in both real-money (gambling) and play-money (game) formats, and 
a few have developed large communities of regular traders. Popular 
play-money markets include the Hollywood Stock Exchange 
(http://www.hsx.com), which focuses on movie box-office returns, 
NewsFutures’ World News Exchange (http://us.NewsFutures.com) which covers 
sports, finance, politics, current events and entertainment, and the 
Foresight Exchange (http://www.ideosphere.com), which focuses on long term 
scientific discoveries and some current events. Real-money exchanges that 
are popular with the American public include the Iowa Electronic Markets 
(http://www.biz.uiowa.edu/iem), which focuses on political election returns 
(under a special no-action agreement with the CFTC, in part due to its 
university affiliation and individual investment limit of US$500), and 
TradeSports (http://www.TradeSports.com), a betting exchange headquartered 
in Ireland. 

In the last few years, researchers have closely studied the predictions 
implied by prices in these markets, and have found them to be remarkably 
accurate, whether they operate with real-money or play-money. For instance, 
the researchers who operate the Iowa Electronic Market have found that their 
markets routinely outperform opinion polls in predicting the ultimate result 
of political elections in the U.S. and abroad (Berg et al. 2000; Forsythe et 
al. 1999). Pennock et al. (2001a; 2001b) looked at the trading prices from 
the Foresight Exchange and the Hollywood Stock Exchange, showing them to be 
closely correlated with actual outcome frequencies in the real world, in 
some cases outperforming expert prognostications. Prices in many sports 
gambling markets have shown excellent predictive accuracy while financial 
derivatives prices have been shown as good forecasts of the fate of their 
underlying instruments (Jackwerth & Rubinstein 1996; Roll 1984). In a series 
of experiments, researchers at Hewlett-Packard enrolled some of the 
company’s employees as prediction traders, and found that their forecasts of 
product sales systematically outperform the official ones (Chen et al. 
2002). Other controlled laboratory experiments have verified the power of 
prediction markets to aggregate information diffused across a trading 
population (Plott and Sunder 1988). Wolfers and Zitzewitz (2004) survey of 
the performance of prediction markets across these and other contexts.

Early successes have attracted the attention of corporations and 
policymakers, and most famously the Pentagon, eager to improve their 
forecasting methods by leveraging a wider base of knowledge and analysis. 
For example, the Pentagon agency DARPA had backed a project called the 
Policy Analysis Market (PAM), a futures market in Middle East related 
outcomes (Polk et al. 2003), until a political firestorm killed the project. 
Academic and policy interest in these markets remains robust, and it appears 
likely that private-sector firms will step into this void (Kiviat 2004; 
Pethokoukis 2004). Part of the allure is that whereas only so many people 
can be practically gathered into the same room at the same time for a 
coherent discussion, on-line prediction markets can easily aggregate the 
insights of an unlimited number of potentially knowledgeable people 
asynchronously.