Can prediction markets help improve economic forecasts?
At VOX, David Hendry and James Reade examine the question, “How should we make economic forecasts?” Among the ideas discussed is whether prediction markets could be used to improve economic forecasting. Interesting suggestion and seeming to be worthy of additional exploration, but the authors don’t go too deep here. Instead, they assert that “prediction markets can be viewed as a form of … model averaging,” and then drift into a discussion of forecast averaging. I’m not sure that forecast averaging is a good way to look at prediction markets. Here is what they say: Prediction markets can be viewed as a form of forecast pooling or model averaging, a common forecast technique (Bates and Granger 1969, Hoeting et al 1999 and Stock and Watson 2004). That is, forecasts from different models are combined to produce a single forecast. In prediction markets, each market participant makes a forecast based on his or her own forecasting model, and the market price is some function of each of these
