Price Formation in Field Prediction Markets : The Wisdom in the Crowd

Prediction markets are a popular structure for a collective intelligence platform. The exact mechanism by which information known to the participating traders is incorporated into the market price is unknown. This paper demonstrates a novel method derived from the Kyle (1985) model for price formation and applies it to data from a field experiment prediction market. The method is able to identify traders whose trades have price impact that adds a significant amount of information to the market price, and those not identified as informed have price impact consistent with noise trading. Results are reproduced on other prediction market datasets