Via Joseph Sterlynne on the Extropy list:

NEC Research Institute Technical Report #2000-168.
A brief version appears in Science 291: 987-988, February 9 2001
The Power of Play: Efficiency and Forecast Accuracy in Web Market Games
David M. Pennock
Steve Lawrence
C. Lee Giles
Finn Årup Nielsen1


We analyze the efficiency and forecast accuracy of two market games on
the World Wide Web: the Hollywood Stock Exchange (HSX) and the
Foresight Exchange (FX). We quantify the degree of arbitrage available
on HSX, and compare with a real-money market of a similar nature. We
show that prices of HSX movie stocks provide good forecasts of actual
box office returns, and that prices of HSX securities in Oscar, Emmy,
and Grammy award outcomes constitute accurate assessments of the
actual likelihoods that nominees will win. Similar investigations
reveal that FX securities prices serve as reliable indicators of
uncertain future events. We argue that, in certain circumstances,
market simulations can furnish some of the same societal benefits as
real markets, and can serve as acceptable substitute testbeds for
conducting experiments that would otherwise be difficult or

Keywords: analysis of artificial markets, World Wide Web market games,
market simulations, forecast accuracy, economic efficiency, arbitrage,
Hollywood Stock Exchange, Foresight Exchange, utility for intangibles


The core service of a market is to facilitate the exchange of items
between individuals. The use of prices for these items, denominated in
a common currency (e.g., US dollars), simplifies trading across
multiple markets, alleviating the combinatorial nature of direct
barter. Prices reflect an agreement between buyers and sellers, and
serve as a quantitative measure of the value of the item being
exchanged, as compared to other marketable items.

When markets attract broad participation, prices can encode the sum
total of a large amount of disparate and distributed information. The
prices reflect, in a very real sense, the consensus opinion of a
myriad of informed and well-motivated traders. As such, even
nonparticipating observers may stand to benefit from the informational
value of market signals. As an example, the odds in a horse race,
determined solely by market forces at the track, can be viewed as
assessments of the likelihoods that the various horses will
win. Empirical studies verify that odds on horses do indeed match very
closely with their observed frequencies of winning [1,18,19,20,22].

As traditional markets expand onto electronic platforms, and as new
electronic marketplaces emerge, price information will be available
and accessible in quantities previously unimaginable. Nevertheless,
markets will still only cover a miniscule fraction of arenas for which
informed forecasts might be valuable or interesting. Many barriers
exist for the establishment of new markets, including high costs,
government regulation, and the threat of lawsuits. Artificial markets,
on the other hand, suffer from no such difficulties. Web market games,
in particular, often feature moderate operating costs for setup,
maintenance, advertising, searching, and transacting, and benefit from
worldwide audience potential. Permission is not required from
government authorities or regulatory officials. Lawsuits are much less
of a concern. There is little need for carefully crafted disclaimers
or facilities for dispute resolution. Users can remain anonymous, and
record keeping can be somewhat lax. All of these factors have
contributed to a growing prevalence of market games on the web, some
enjoying widespread popularity. Of course, artificial markets cannot
satisfy societal demand for the exchange of items. However, in this
paper we present evidence that some market simulations can function
reasonably well in the dual role as aggregators and disseminators of

Theories of market equilibrium, including the rational expectations
theory of information propagation, usually depend on the assumption
that participants maximize expected utility, where utility is derived
from consumables or monetary equivalents. Indeed, laboratory economics
experiments in which subjects are not ``paid to play'' are often
questioned on the grounds of a lack of true incentives. In a game
without monetary backing, utility is presumably extracted solely from
entertainment value, educational value, bragging rights, and/or other
intangible sources. Does market efficiency simply break down under
these conditions, or can non-monetary rewards actually drive price
coherence, information aggregation, and forecast accuracy? We find
evidence that, in some cases, they can and they do. In Section 3 we
quantify price coherence on the Hollywood Stock Exchange
(HSX). Equivalent portfolios trade at reasonably consistent prices,
and, over time, large inefficiencies disappear, as players presumably
take advantage. In Section 4 we evaluate the collective competence of
traders on HSX and on the Foresight Exchange (FX), by measuring the
prescient value of market prices. In doing so, we find that HSX stock
prices are reliable indicators of what movies will do well at the box
office, that HSX award option prices provide accurate assessments of
which nominees will likely win entertainment awards, and that FX
prices constitute accurate probabilistic judgments for a variety of
uncertain future events.

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