Price Biases and Contract Design: Lessons from Tradesports

Abstract

From 2000 to 2008, Tradesports operated an online betting site where gamblers used real money to wager on the outcomes of various sporting events. A critical difference between Tradesports and traditional casino-type venues is that participants were allowed to place wagers after underlying sporting events began. Thus, during its heyday, Tradesports was perhaps the ultimate laboratory for examining trader behavior during periods of high-intensity information flow. The lifespan of most sports-related contracts was around three hours, and tens of thousands of contracts were traded during many of these events. In a number of studies, inspection revealed several persistent biases. Understanding the source of these biases can potentially help corporations design and implement bias-free internal prediction markets that produce precise estimates of the likelihood of event outcomes.

Keywords: Tradesports, Prediction Market