An Experimental Test of Combinatorial Information Markets

While a simple information market lets one trade on the probability of each value of a single variable, a combinatorial information market lets one trade on any combination of a set of variables, including any conditional or joint probability. In laboratory experiments, we compare the accuracy of simple markets, two kinds of combinatorial markets, a call market and a market maker, isolated individuals who report to a scoring rule, and two ways to combine those individual reports into a group prediction. We consider two environments with asymmetric information on sparsely correlated binary variables, one with three subjects and three variables, and one with six subjects and eight variables (and so 256 states). ∗For their comments, we thank David Porter, Ryan Oprea, and participants of seminars at George Mason University, Brigham Young University, University of Michigan, James Madison University, University of California at Los Angeles, Overture Research, Microsoft Research, and the DIMACS Workshop on Markets as Predictive Devices. We thank DARPA for financial support. †[email protected] http://hanson.gmu.edu 703-993-2326 FAX: 703-993-2323 MSN 1D3, Carow Hall, Fairfax VA 22030