The effect of malicious manipulations on prediction market accuracy

Prediction markets are a form of group decision support system which uses a market mechanism to elicit and aggregate information from large numbers of individuals. The literature recognises their potential as decision support tools, but also notes several issues of concern regarding their utility in an organisational setting. One critical concern is the possibility that prediction markets may be subject to malicious manipulation. This paper presents a field experiment which examines the effect of such manipulations on prediction market performance. We divide a sample of 72 contracts into a control group and an experimental group. Contracts in the experimental group are manipulated by a trader with a malicious motivation. The study demonstrates that manipulations do have an effect on prediction market accuracy, but that these effects are rapidly ameliorated by rational traders and shows that fear of malicious manipulation should not preclude the use of prediction markets as organisational decision making tools.