1. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Are prediction markets robust against manipulation? A lab experiment Martin Strobel, University of MaastrichtFeb. 2005

2. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Prediction Markets: General Idea Reality Market PricePrediction Action Mani- pulator

3. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Experiment Design: Fundamental Values Futures traded: BLACK and WHITE Fundamental values: –BLACK: number of black balls –WHITE: number of white balls Information: each trader knows a randomly drawn subset 100 balls Trader 1 Trader 2 …

4. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Experimental Design: General Setup Double auction Similar to PSMs (bundles = 100 ECU, portfolios were liquidated afterwards for fundamental values) 8 sessions (S1 … S4 and M1 … M4) Same instructions for S and M sessions 12 traders per session (10 for S2 and M2) Per session 7 markets with 7 minutes duration Endowment for each market: 1000 ECU and 20 shares either BLACK or WHITE

5. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Experimental Design: Manipulation I Robot player for manipulation Focus on one simple method: excessive buying leads to price increases 90 sec quiet 240 sec manipulation 90 sec “recovery” (60 sec) Lowest ask Highest bid Asks Bids Lowest ask+10 Random bid was placed

6. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Experimental Design: Manipulation II Money was spread evenly among future time Cash of manipulator is limited to 2 * 20 * fund. value (corresponds to an average endowment if value = 50) Lowest ask Highest bid Asks Bids Lowest ask+10 Random bid was placed

7. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Experiment Design: Software

8. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Expectations 100 price fund. value best case baseline case manipulation case

9. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Analysis start of market start of manipulation end of market end of manipulation 90 sec 270 sec60 sec 420 sec BeforePrice AfterPrice EndPrice Manipulation has no effect Manipulation has a temporary effect Manipulation has a durable effect Hypotheses:

10. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Results CoefficientsBeforePriceAfterPriceEndPrice Fund. value 0.36** [0.19; 0.53] 0.52*** [0.32; 0.73] 0.67*** [0.57; 0.77] Directly manip. -0.18 [-10.10; 9.74] 3.83 [-3.00; 10.66] 3.25** [0.47; 6.04] Indirectly manip -1.16 [-8.73; 6.41] -0.79 [-6.90; 5.33] -3.11*** [-4.84; -1.39] Constant 30.84** [16.05; 45.62] 22.04*** [8.42; 35.66] 16.57*** [11.92; 21.22] R2R2 0.400.640.90 Observations104108112

11. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Critique and Preliminary Conclusions Proof of existence No final answer to: Are markets vulnerable to manipulation? 60 sec for recovery time is too short!? Short-selling would solve the problem!? After some time traders would incorporate manipulators in their reasoning!?

12. Martin Strobel, University of MaastrichtDIMACS, Feb. 2005 Further Plans Varying knowledge, uncertainty, discreteness, … Allow for short-selling? Compare results to Hanson, Oprea and Porter (forthcoming)