Modeling Idea Markets: Between Beauty Contests and Prediction Markets

Modeling Idea Markets: Between Beauty Contests and Prediction Markets

By
Iván Marinovic, Marco Ottaviani, Peter Norman Sorensen
Prediction Markets: Theory and Applications. Routledge,
2011

This paper is motivated by a recent surge of interest in evaluating ideas (such as new products or corporate projects) by means of trading mechanisms known as idea markets. In idea markets, ideas are associated to assets that are then traded among market participants who possess relevant information. In a baseline design, traders are rewarded on the basis of the value of their portfolio when the market is closed. Idea markets hold great promise to initially complement and eventually substitute traditional techniques for market research mostly based on costly surveys. In this paper, we investigate the information aggregation properties of idea markets, focusing on the role played by the incentive to buy popular assets, and on how this incentive depends on the size of the market.