AN EMPIRICAL INVESTIGATION OF THE FORECASTACCURACY OF PLAY-MONEY PREDICTION MARKETS ANDPROFESSIONAL BETTING MARKETS

Prediction markets have proven high forecasting performance in many areas such as politics, sportsand business-related fields compared to traditional instruments such as polls or expert opinions. Theadvantage of real-money prediction markets is to provide participants with a clear incentive to revealtheir true opinion on the outcome of an event. However, it is to date unclear whether play-moneyprediction markets, where participants cannot suffer any losses, perform well compared to other, morestrongly incentivized instruments. Thus, the goal of this paper is to compare the forecast accuracy ofplay-money prediction markets with that of instruments with a monetary incentive to make as accuratepredictions as possible, namely fixed-odds betting. We present the results of an empirical study thatcompares the forecast accuracy of a play-money prediction market for the FIFA World Cup 2006 topredictions derived from odds issued by two professional betting companies. Additionally, we comparethe prediction market with two more benchmarks, namely the FIFA world ranking which is based onhistoric data and a random predictor. We find that the play-money prediction markets for the FIFAWorld Cup are about as accurate as betting markets. Moreover, the prediction markets clearlyoutperform the FIFA world ranking as well as the random predictions.