Affecting policy by manipulating prediction markets: Experimental evidence

Documented results indicate prediction markets effectively aggregate information and form accurate predictions. This has led to a proliferation of markets predicting everything from the results of elections to a company's sales to movie box office receipts. Recent research suggests prediction markets are robust to manipulation attacks and resulting market outcomes improve forecast accuracy. However, we present evidence from the lab indicating that single-minded, well-funded manipulators can in fact destroy a prediction market's ability to aggregate informative prices and mislead those who are making forecasts based upon market predictions. However, we find that manipulators primarily influence market trades meaning outstanding bids and asks remain informative.

► Absent manipulation, forecasters successfully use price information to predict.
► Bids and asks carry information about traders’ beliefs.
► Forecasters who use excess bids information improve their prediction accuracy.
► Incentivized manipulators can destroy the predictive power of an information market.
► Manipulators cause inexperienced forecasters to make bad predictions.