Analyzing prediction market mechanism using artificial markets

In this study, we use agent-based simulation to clarify the condition that makes prediction markets effective. An artificial market is a virtual financial market run on a computer. Agents participate in them as computer programs that play the role of virtual dealers. In the simulation, we confirm the influence of the following parameters: information transmission frequency, the retention of motivation, and the rate of the innovators. The results of this study suggest that prediction markets realize more accurate results than opinion polls under the following conditions: the existence of innovators (well-informed traders) and relatively low motivation.