Bluffing and strategic reticence in prediction markets

Yiling Chen, Daniel M. Reeves, David M. Pennock, Robin D. Hanson, Lance Fortnow, Rica Gonen

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review


We study the equilibrium behavior of informed traders interacting with two types of automated market makers: market scoring rules (MSR) and dynamic parimutuel markets (DPM). Although both MSR and DPM subsidize trade to encourage information aggregation, and MSR is myopically incentive compatible, neither mechanism is incentive compatible in general. That is, there exist circumstances when traders can benefit by either hiding information (reticence) or lying about information (bluffing). We examine what information structures lead to straightforward play by traders, meaning that traders reveal all of their information truthfully as soon as they are able. Specifically, we analyze the behavior of risk-neutral traders with incomplete information playing in a finite-period dynamic game. We employ two different information structures for the logarithmic market scoring rule (LMSR): conditionally independent signals and conditionally dependent signals. When signals of traders are independent conditional on the state of the world, truthful betting is a Perfect Bayesian Equilibrium (PBE) for LMSR. However, when signals are conditionally dependent, there exist joint probability distributions on signals such that at a PBE in LMSR traders have an incentive to bet against their own information- strategically misleading other traders in order to later profit by correcting their errors. In DPM, we show that when traders anticipate sufficiently better-informed traders entering the market in the future, they have incentive to partially withhold their information by moving the market probability only partway toward their beliefs, or in some cases not participating in the market at all.

Original languageEnglish
Title of host publicationInternet and Network Economics - Third International Workshop, WINE 2007, Proceedings
PublisherSpringer Verlag
Number of pages12
ISBN (Print)9783540771043
StatePublished - 2007
Externally publishedYes
Event3rd International Workshop on Internet and Network Economics, WINE 2007 - San Diego, CA, United States
Duration: 12 Dec 200714 Dec 2007

Publication series

NameLecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
Volume4858 LNCS
ISSN (Print)0302-9743
ISSN (Electronic)1611-3349


Conference3rd International Workshop on Internet and Network Economics, WINE 2007
Country/TerritoryUnited States
CitySan Diego, CA


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