Can Manipulators Mislead Market Observers? – Ryan Oprea, David Porter, Chris Hibbert, Robin Hanson and Dorina Tila.
This study showed that uninformed third parties (observers) are able to make significantly better forecasts of asset values based on market prices (of those values) in an experimental market. Even when half of the traders attempted to manipulate the market, the observers’ forecasts were no less accurate.
It appears that the observers are able to adjust the market price to remove most, or all, of the effects of manipulation. To me, this means the observers were using some other form of decision model to arrive at their forecast. Such a model used the market price along with other trade data, enabling the observer to alter the forecast from that determined by the market price alone. The authors note that the observers were able to do this, despite the fact that the non-manipulative traders and the observers did not know which direction the incentives for manipulation ran.
This is quite a remarkable result. It would have been nice to know how they were able to make these accurate forecasts with market price data that had been manipulated. One of the findings was that upward price manipulation resulted in about a 7% increase in the market price (though there was no similar effect for downward manipulation). The authors note that further study is required along with robustness tests. I agree that it might yield very useful insight into the process of making a forecast based on prediction market prices.
In a sense, the observer should be considered a decision-maker. If decision-makers are able to filter out the effects of manipulation in a real public policy prediction market and make an accurate forecast of the underlying metric, perhaps there is a role for such markets. I would feel a lot more comfortable if we knew how the decision-maker (observer) is able to accomplish this feat. Finally, we need to know if this was only possible, because it was a fairly simple experimental model. Will the same decision-maker’s ability exist in extremely complex public policy markets?