Experimental Evaluation of Inventory-Based Discrete-Updating Market Maker for Intra-firm Prediction Market System Using VIPS

This paper develops an intra-firm prediction market system as a collective-knowledge-based forecasting tool for a company and evaluates its performance through laboratory experiments. The system uses the variableinterval prediction security (VIPS) as the prediction security to be traded in the market and is controlled by an original computerized market maker suitable for the security type. The market maker evaluates each unit of VIPS with a Gaussian price distribution and updates the distribution intermittently through an inventory-based updating logic according to the transactions in the market. Laboratory experiments are conducted with a virtual demand forecasting problem to study whether the system functions properly as a subjective forecasting tool. The experiments confirm that the system is capable of penalizing arbitrage actions and hence its performance is fairly stable. Further, the output price distribution can serve as an approximate forecast distribution.